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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.

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Official URL: http://dx.doi.org/10.1016/j.jdeveco.2008.06.013

Abstract

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.

Item Type: Article
Keyword(s) / Subject(s): Sovereign Debt, serial default, default premium, emerging market bond spreads, asymmetric information, output persistence
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Administrator
Date Deposited: 24 Nov 2010 11:56
Last Modified: 17 Apr 2013 12:33
URI: http://eprints.bbk.ac.uk/id/eprint/1959

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