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Sovereign default: which shocks matter?

By Bernardo Guimaraes

Abstract

This paper analyses a small open economy that wants to borrow from abroad, cannot commit to repay debt but faces costs if it decides to default. The model generates analytical expressions for the impact of shocks on the incentive compatible level of debt. Debt reduction generated by severe output shocks is no more than a couple of percentage points. In contrast, shocks to world interest rates can substantially affect the incentive compatible level of debt

Topics: HC Economic History and Conditions, HG Finance
Publisher: Elsevier
Year: 2011
DOI identifier: 10.1016/j.red.2010.10.002
OAI identifier: oai:eprints.lse.ac.uk:38580
Provided by: LSE Research Online
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