Persistent gaps and default traps
Catao, L.A.V. and Fostel, A. and Kapur, Sandeep (2009) Persistent gaps and default traps. Journal of Development Economics 89 (2), pp. 271-284. ISSN 0304-3878.
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.
|Keyword(s) / Subject(s):||Sovereign Debt, serial default, default premium, emerging market bond spreads, asymmetric information, output persistence|
|School:||Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics|
|Date Deposited:||24 Nov 2010 11:56|
|Last Modified:||17 Apr 2013 12:33|
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