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Self-Fulfilling Debt Crises with Long Stagnations

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Abstract

We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the southern European crisis of the early 2010s and the Argentine default of 2001. The source of multiplicity is the one in Calvo (1988). Crucial for multiplicity is an output process characterized by long periods of either high growth or stagnation, which we estimate using data for these countries. We find that expectations-driven debt crises are quantitatively relevant but state dependent, as they occur only during periods of stagnation. Expectations, and how they respond to policy, are the major factors explaining default rates and credit spread differences between Spain and Argentina.

Suggested Citation

  • Joao Ayres & Gaston Navarro & Juan Pablo Nicolini & Pedro Teles, . "Self-Fulfilling Debt Crises with Long Stagnations," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:98597
    DOI: 10.21034/sr.659
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    More about this item

    Keywords

    Stagnations; Self-fulfilling debt crises; Multiplicity; Sovereign default;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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