Maturity, Indebtedness, and Default Risk

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe present a novel and tractable model of long-term sovereign debt. We make two sets of contributions. First, on the substantive side, using Argentina as a test case we show that unlike one-period debt models, our model of long-term sovereign debt is capable of accounting for the average spread, the average default frequency, and the average debt-tooutput ratio of Argentina over the 1991-2001 period without any deterioration in the model's ability to account for Argentina's cyclical facts. Using our calibrated model we determine what Argentina's debt, default frequency and welfare would have been if Argentina had issued only short-term debt. Second, on the methodological side, we advance the theory of sovereign debt begun in Eaton and Gersovitz (1981) by establishing the existence of an equilibrium pricing function for long-term sovereign debt and by providing a fairly complete set of characterization results regarding equilibrium default and borrowing behavior. In addition, we identify and solve a computational problem associated with pricing long-term unsecured debt that stems from nonconvexities introduced by the possibility of default.

Sovereign Debt Restructurings: Preemptive or Post-Default

“…The set of amount of bonds is B D OEb min ; 1/ R where b min Ä 0. The lower bound is the highest level of debt that the country can hold-that is, b min < y max =r as in Arellano (2008) and Chatterjee and Eyigungor (2012). We assume that q.b tC1 ; h t ; y t / is the price of a bond with asset position (b tC1 ), credit record (h t ), and income level (y t ).…”

“…We use a conventional debt restructuring model with one-period zero-coupon bonds as in Benjamin andWright (2009), Bi (2008), and Yue (2010). Some recent studies use models with long maturity bonds without restructurings, for instance Hatchondo and Martinez (2009), Chatterjee and Eyigungor (2012), and Arellano and Ramanarayanan (2012).…”

Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

“…On runs and rollover risk in the sovereign debt context,Chatterjee and Eyigungor (2011).© 2013 The Author(s). The Economic Journal © 2013 Royal Economic Society.F22 T H E E C O N O M I C J O U R N A L [ F E B R U A R Y…”

Take the Short Route: Equilibrium Default and Debt Maturity

“…3 The international quantitative sovereign debt literature emphasizes instead incentives, lack of commitment, and the resulting default risk. Hatchondo, Carlos, and Martinez (2009) and Chatterjee and Eyigungor (2012) showed that restricting the government to issue long-term bonds improves the quantitative fit of sovereign debt models, and discussed the government's incentives to dilute existing bondholders. Arellano and Ramanarayanan (2012) introduced maturity choice into this framework and showed that a calibrated version of the model features shortening maturity as default risk increases.…”