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Publications
  • March 2005
  • Article
  • Journal of International Economics

Sovereign Debt As a Contingent Claim: A Quantitative Approach

By: Laura Alfaro and Fabio Kanczuk
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Abstract

We construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt. In the model, benefits of defaulting are tempered by higher future interest rates. For a wide set of parameters, the only equilibrium is one in which the sovereign defaults in all states; additional output losses, however, sustain equilibria that resemble the data. We show that due to the adverse selection problem, some countries choose to delay default to reduce loss of reputation. Moreover, although equilibria with no default imply in greater welfare levels, they are not sustainable in highly indebted and volatile countries.

Keywords

Sovereign Finance; Borrowing and Debt; Interest Rates; Balance and Stability; Risk and Uncertainty; Risk Management; Mathematical Methods; Management Style; Segmentation; Debt Securities; Banking Industry

Citation

Alfaro, Laura, and Fabio Kanczuk. "Sovereign Debt As a Contingent Claim: A Quantitative Approach." Journal of International Economics 65, no. 2 (March 2005).
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About The Authors

Laura Alfaro

General Management
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Fabio Kanczuk

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More from the Authors

    • 2022
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    Distributional Consequences of Monetary Policy Across Races: Evidence from the U.S. Credit Register

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    El Salvador: Launching Bitcoin as Legal Tender

    By: Laura Alfaro, Carla Larangeira and Ruth Costas
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    Can Evidence-Based Information Shift Preferences Towards Trade Policy?

    By: Laura Alfaro, Maggie X. Chen and Davin Chor
More from the Authors
  • Distributional Consequences of Monetary Policy Across Races: Evidence from the U.S. Credit Register By: Laura Alfaro, Ester Faia and Camelia Minoiu
  • El Salvador: Launching Bitcoin as Legal Tender By: Laura Alfaro, Carla Larangeira and Ruth Costas
  • Can Evidence-Based Information Shift Preferences Towards Trade Policy? By: Laura Alfaro, Maggie X. Chen and Davin Chor
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