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The Sovereign Default Puzzle: Modelling Issues and Lessons for Europe

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  • Cohen, Daniel
  • Villemot, Sébastien

Abstract

Why do countries default? This seemingly simple question has yet to be adequately answered in the literature. Indeed, prevailing modelling strategies compel the to choose between two unappealing model features: depending on the cost of default selected by the modeler, either the debt ratios are too high and the probability of default is too low or the opposite is true. In view of the historical evidence that countries always default after a crisis, we propose a novel approach to the theory of debt default and develop a model that matches the key stylized facts regarding sovereign risk.

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  • Cohen, Daniel & Villemot, Sébastien, 2012. "The Sovereign Default Puzzle: Modelling Issues and Lessons for Europe," CEPR Discussion Papers 8971, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8971
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    Cited by:

    1. Jean-Marc Fournier & Manuel Bétin, 2018. "Sovereign defaults: Evidence on the importance of government effectiveness," OECD Economics Department Working Papers 1494, OECD Publishing.

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    More about this item

    Keywords

    Levy stochastic processes; Sovereign debt;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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