Skip to main content
Article thumbnail
Location of Repository

Persistent gaps and default traps

By L.A.V. Catao, A. Fostel and Sandeep Kapur


We show how vicious circles in countries' credit histories arise in a model where output persistence is coupled with asymmetric information about output shocks. In such an environment, default signals the borrower's vulnerability to adverse shocks and creates a pessimistic growth outlook. This translates into higher interest spreads and debt servicing costs relative to income, raising the cost of future repayments, thereby creating “default traps”. We build a long and broad cross-country dataset to show the existence of a history-dependent “default premium” and of significant effects of output persistence on sovereign creditworthiness, consistent with the model's predictions

Topics: ems
Publisher: Elsevier
Year: 2009
OAI identifier:

Suggested articles


  1. (1981). A New Approach to Decomposition of Economic Time Series into Permanent and Transitory doi
  2. (2005). A Supply Story: Emerging Markets, High Yield and
  3. (2000). Balance of Payments Crises in Emerging Markets: Large Capital Flows and Sovereign Governments,”
  4. (2000). Capital Markets Crises and Economic Collapse in Emerging Markets: An Informational Frictions Approach,” American Economic Review, Papers and Proceedings, doi
  5. (2006). Country Spreads and Emerging Countries: Who drives whom?,” doi
  6. (1986). Debt and Default in the 1930s: Causes and doi
  7. (1992). Debt Crisis: A Post-Mortem,” doi
  8. (2006). Debt Defaults and Lessons from a Decade of Crises,” doi
  9. (1981). Debt with Potential Repudiation: Theoretical and Empirical Analysis,” doi
  10. (2006). Debt, Interest Rates and the Current Account,” doi
  11. (2006). Default Risk and Income Fluctuations in Emerging Economies,” mimeo, doi
  12. (2007). Emerging Market Business Cycles: The Cycle is the Trend,” doi
  13. (2006). Endogenous Sudden Stops in a Business Cycle Model with Collateral Constraints: A Fisherian Deflation of Tobin’s Q,” mimeo. doi
  14. (1996). Gold Standard as a ‘Good Housekeeping Seal of Approval’,” doi
  15. (2007). Government Reputation and Debt Repayment in Emerging Economies,” mimeo,
  16. (2006). How do Trade and Financial Integration affect the Relationship between Growth and Volatility,” doi
  17. (2000). How Persistent are Shocks to World Commodity Prices?,” doi
  18. (1989). How Sovereign Debt has Worked,”
  19. (2005). Institutions as the Fundamental Cause of Long-Run Growth,” doi
  20. (2006). Living with Debt. How to Limit the Risks of Sovereign Finance,
  21. (2007). Solving the Country Risk-Business Cycle Disconnect: Endogenous Output Dynamics in a Model of Sovereign Default,” mimeo.
  22. (1995). Some Curious Properties of a Familiar Model of Debt and doi
  23. (2004). Sovereign Borrowing by Developing Countries: What Determines Market Access?,” doi
  24. (2005). Sovereign Debt as a Contingent Claim: A Quantitative Approach,” doi
  25. (1988). Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, doi
  26. (1996). Sovereign Debt, Reputation, and Credit Terms,” doi
  27. (2003). Sovereign Risk, Credibility and the Gold Standard: 1870-1913 versus 1925-31,” doi
  28. (2007). Sudden Stops and Currency Drops: A Historical Look” doi
  29. (1995). Terms of Trade, the Real Exchange Rate, doi
  30. (2004). The Making of Global Finance 1880-1913, doi
  31. (1999). The Twin Crises: Causes of Banking and doi
  32. (2004). When It Rains, It Pours: doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.