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Sovereign Default and the Decline in Interest Rates

By: Max Miller, James D. Paron and Jessica Wachter
  • Format:Print
  • | Language:English
  • | Pages:90
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Abstract

Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk. We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth. Calibrations of the model post-Covid suggest that sovereign default risk may have returned.

Keywords

Inflation and Deflation; Interest Rates; Debt Securities

Citation

Miller, Max, James D. Paron, and Jessica Wachter. "Sovereign Default and the Decline in Interest Rates." NBER Working Paper Series, No. 34021, July 2025. (Revise and Resubmit, Review of Financial Studies.)

About The Author

Max J. Miller

Finance
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