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Quantitative Properties Of Sovereign Default Models
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Book Synopsis Quantitative properties of sovereign default models by : Mr.Leonardo Martinez
Download or read book Quantitative properties of sovereign default models written by Mr.Leonardo Martinez and published by International Monetary Fund. This book was released on 2010-04-01 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of grid points to avoid generating spurious interest rate movements. This makes the discrete state technique significantly more inefficient than using Chebyshev polynomials or cubic spline interpolation to approximate the value functions. We show that the inefficiency of the discrete state space technique is more severe for parameterizations that feature a high sensitivity of the bond price to the borrowing level for the borrowing levels that are observed more frequently in the simulations. In addition, we find that the efficiency of the discrete state space technique can be greatly improved by (i) finding the equilibrium as the limit of the equilibrium of the finite-horizon version of the model, instead of iterating separately on the value and bond price functions and (ii) concentrating grid points in asset levels at which the bond price is more sensitive to the borrowing level and in levels that are observed more often in the model simulations. Our analysis questions the robustness of results in the sovereign default literature and is also relevant for the study of other credit markets.
Book Synopsis Recent Developments in Quantitative Models of Sovereign Default by : Nikolai Stähler
Download or read book Recent Developments in Quantitative Models of Sovereign Default written by Nikolai Stähler and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Recent Developments in Quantitative Models of Sovereign Default by : Nikolai Stahler
Download or read book Recent Developments in Quantitative Models of Sovereign Default written by Nikolai Stahler and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The current crisis and discussions, in the euro area in particular, show that sovereign debt crises/defaults are no longer confined to developing economies. Following crises in many Latin American countries, the literature on quantitative dynamic macro models of sovereign default has been advancing rapidly. Current debate should take note of the findings of this literature - an extensive overview of which has been provided in this paper. This paper also discusses the inherent difficulties as well as possibilities of integrating this type of model into standard business cycle models (RBC and DSGE models). This is likely to be particularly helpful when using models to analyse upcoming issues in the euro area, such as a suitable sovereign insolvency law or the assumption of joint liability.
Book Synopsis Quantitative Models of Sovereign Default and the Threat of Financial Exclusion by : Juan Carlos Hatchondo
Download or read book Quantitative Models of Sovereign Default and the Threat of Financial Exclusion written by Juan Carlos Hatchondo and published by . This book was released on 2008-01 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: Studies the role of the assumption that countries can be punished with financial exclusion after a sovereign default. It describes the business cycle properties of a sovereign default model with the exclusion punishment & compares them with those of the same model without the exclusion punishment. Both models build on the framework studied in Aguiar & Gopinath (2006). Finds that the presence of exclusion punishment is responsible for a high fraction of the sovereign debt that can be sustained in equilibrium. On the other hand, the cyclical behavior of consumption, output, interest rate, & net exports are not fundamentally different in the models with & without exclusion. Charts & tables.
Book Synopsis On the Costs of Sovereign Default in Quantitative Models by : Bernardo Guimarães
Download or read book On the Costs of Sovereign Default in Quantitative Models written by Bernardo Guimarães and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis A General Equilibrium Model of Sovereign Default and Business Cycles by : Mr.Enrique G. Mendoza
Download or read book A General Equilibrium Model of Sovereign Default and Business Cycles written by Mr.Enrique G. Mendoza and published by International Monetary Fund. This book was released on 2011-07-01 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-noc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around deraults, countercyclical spreads, high debt ratios, and key business cycle moments.
Book Synopsis Quantitative Sovereign Default Models and the European Debt Crisis by : Luigi Bocola
Download or read book Quantitative Sovereign Default Models and the European Debt Crisis written by Luigi Bocola and published by . This book was released on 2018 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: A large literature has developed quantitative versions of the Eaton and Gersovitz (1981) model to analyze default episodes on external debt. In this paper, we study whether the same framework can be applied to the analysis of debt crises in which domestic public debt plays a prominent role. We consider a model where a government can issue debt to both domestic and foreign investors, and we derive conditions under which their sum is the relevant state variable for default incentives. We then apply our framework to the European debt crisis. We show that matching the cyclicality of public debt ---rather than that of external debt--- allows the model to better capture the empirical distribution of interest rate spreads and gives rise to more realistic crises dynamics.
Book Synopsis Heterogeneous Borrowers in Quantitative Models of Sovereign Default by :
Download or read book Heterogeneous Borrowers in Quantitative Models of Sovereign Default written by and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: "We study an economy in which policymakers of different types (patient vs. impatient) alternate in power. Our framework builds on the model used in recent quantitative studies of sovereign default. We show that a default episode may be triggered by a change in the type in office, from a patient to an impatient policymaker. We also show that for this mechanism to be observed in equilibrium, it is necessary that there is enough political stability and that patient policymakers encounter sufficiently poor economic conditions during their tenure. Under high political stability, the presence of political turnover enables the model to generate: (i) a higher and more volatile spread (even when we focus on samples where only the patient type is in office), (ii) lower borrowing levels after a default episode, and (iii) a weaker correlation between economic conditions and default decisions. These results narrow the gap between the predictions of the model and the data."--Federal Reserve Bank of Richmond web site.
Book Synopsis Heterogeneous Borrowers in Quantitative Models of Sovereign Default by : Juan Carlos Hatchondo
Download or read book Heterogeneous Borrowers in Quantitative Models of Sovereign Default written by Juan Carlos Hatchondo and published by . This book was released on 2014 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to alternate in power. We show that a default episode may be triggered by a change in the type of policymaker in office, and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions. Under high political stability, political turnover enables the model to generate a weaker correlation between economic conditions and default decisions, a higher and more volatile spread, and lower borrowing levels after a default episode.
Book Synopsis Three Essays on Sovereign Default by : Jinwook Nam
Download or read book Three Essays on Sovereign Default written by Jinwook Nam and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first chapter examines the cyclicality of debt in standard quantitative sovereign default model, the strategic default model. The standard strategic default model has been a canonical model to explain high consumption volatility in emerging markets with default risks, such as Argentina in 2001. These emerging markets with high default risks can be characterized by exhibiting procyclical debt behavior and high level of mean and volatility of interest rate spreads. However, the notion of only emerging markets default has changed, since the Southern European debt crisis starting in 2010. Greece defaulted and other countries such as Italy, Spain, Portugal, and Ireland had debt crisis. Unlike the emerging market economies, these countries exhibited countercyclical debt and consumption less volatile than income. Then, can a standard strategic default model explain the default in advanced economies? We choose Greece as a reference country and attempt to match the Greek data leading up to a debt crisis. We find that the standard strategic default model is not capable of generating a countercyclical debt, therefore, leading to consumption more volatile than income. The experiment results suggest that the only way to make debt countercyclical in the standard strategic model is to raise the magnitude of patience parameter. However, doing so leads to very little borrowing and close to no defaults generated by the model, which would not be an appropriate model for explaining default events. The second chapter studies the sovereign default risk with stochastic risk-free interest rate. The vast majority of sovereign default literature assumes a constant risk-free interest rate, an innocuous assumption given stable US t-bill yields or German Bund yields that are often used as a proxy for risk-free rate. However, with highly inflationary environment and contractionary monetary policy in the US and the EMU, these risk-free interest rates have recently been increasing. We incorporate stochastic risk-free interest rate with the excusable default model that is used to explain defaults in advanced economy. We examine the effect of interest rates fluctuating on accumulation of debt and possibility of default. We find that the sovereign accumulates less debt and relatively at slower rate, when risk-free interest rate is high, lowering the probability of default. However, given high level of debt, an increase in risk-free interest rate leads to an increase in probability of default, because of a fall in ability to pay. In general, the increase in volatility of risk-free interest rates increases the probability of default. This result alarms many countries with high level of debt, given the level of interest rates around the world has been rising. The third chapter examines the stabilization policy in two sovereign default models with downward sticky wages. During recession, aggregate demand falls, but the real wage does not fall enough due to downward sticky wage, especially in countries that adopt a fixed exchange rate or are in monetary union. With the absence of monetary policy, involuntary unemployment arises due to the sticky wage. The governments can stimulate the economy by borrowing and making transfers to households. However, rising debt level increases the probability of default. We find that the strategic default model with downward sticky wage does not stabilize the economy, due to the risk of default. In the strategic default model, declaring default entails costs arising from no commitment to repay. This behavior is consistent with the default case of emerging markets, Argentina in 2001 that exhibited procyclical government debt issuance prior to default. On the other hand, the excusable default model with downward sticky wage stabilizes the economy despite of default of risk. In recession, the sovereign increases borrowing to stimulate the economy, leading to lower the unemployment level. However, if recession continues, the increased borrowing leads to default, which is consistent with the default case in Greece.
Book Synopsis Essays on Modelling the Sovereign Default Risk by : Sébastien Villemot
Download or read book Essays on Modelling the Sovereign Default Risk written by Sébastien Villemot and published by . This book was released on 2012 with total page 316 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis contributes to the literature on sovereign debt and default risk, building on theoretical models of strategic default and on more recent developments of the quantitative sovereign debt literature. The first contribution is to suggest a solution to the "sovereign default puzzle:" most quantitative sovereign debt models predict a default at very low debt-to-GDP thresholds, in clear contradiction with what is observed in the data. Starting from the observation that countries generally do not want to default but are rather forced into it by the markets, I present a model which can replicate the key stylized facts regarding sovereign risk. As another contribution, I establish a typology of debt crises in three categories: those crises that are the consequence of exogenous shocks, those that are self-fulfilling prophecies, and those self-enforcing crises that are the consequence of a rational tendency to over-borrow when the risk of a negative shock is high. The estimated proportion of self-fulfilling and self-enforcing crises in the data is about 10% in each case. I also study how sovereign default can be understood in the context of small open economy real business cycle models. The conclusion is that these models oscillate between two polar cases: default is either inexistent or too frequent, depending on the chosen parameter values. These models are therefore not well suited for studying sovereign risk, and default needs to be fully endogeneized in order to get meaningful results. Finally, I make a methodological contribution by presenting a new computational method for solving endogenous default models. It is shown to dramatically improve the existing speed-accuracy frontier.
Download or read book Essays on Sovereign Default written by and published by . This book was released on 2013 with total page 78 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three independent essays on sovereign default. In the first chapter, I develop a quantitative general equilibrium model of sovereign default to account for spillover of default risk across countries. When the collateral constraint for investors binds due to a decrease in the value of collateral, triggered by a high default risk for one country, credit constrained investors ask for liquidity premiums even to countries with normal fundamentals. This increase in the cost of borrowing increases incentives to default for the other countries with normal fundamentals, further constraining investors in obtaining credit through a decrease in the value of collateral. The quantitative results show that this model can generate spillover of default risk across countries. The essay in the second chapter introduces endogenous capital accumulation to a quantitative model of sovereign default based on Eaton and Gersovitz (1981). With a production technology in the model, output and interest rates are jointly determined by the interaction between a sovereign government who can optimally default and foreign creditors taking into account default risk. Adding investment enables the model to generate unique economic dynamics similar to those observed around emerging economies' default crises: (1) Emerging economies' debt crises display a boom-bust pattern. (2) A non-negligible fraction of sovereign defaults occur in good times. The essay in the third chapter explains why emerging economies borrow abroad in foreign currency. We present a two-period model in which foreign lenders offer a small open economy an optimal self-enforcing contract in which borrowing is denominated in borrowers' currency. Taking into account the government's incentive to inflate away the debt, the optimal lending contract provides consumption insurance for the economy in that the contract allows the economy for inflation in bad times but asks for deflation in good times. As the variance of income shocks for the economy increases, it gets more difficult for the contract to satisfy the incentive compatible constraints at the good income state. The numerical results are consistent with the fact that emerging economies with high income volatility suffer from "Original Sin".
Book Synopsis Managing the Sovereign-Bank Nexus by : Mr.Giovanni Dell'Ariccia
Download or read book Managing the Sovereign-Bank Nexus written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 2018-09-07 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
Book Synopsis Open Economy Macroeconomics by : Martín Uribe
Download or read book Open Economy Macroeconomics written by Martín Uribe and published by Princeton University Press. This book was released on 2017-04-04 with total page 646 pages. Available in PDF, EPUB and Kindle. Book excerpt: A cutting-edge graduate-level textbook on the macroeconomics of international trade Combining theoretical models and data in ways unimaginable just a few years ago, open economy macroeconomics has experienced enormous growth over the past several decades. This rigorous and self-contained textbook brings graduate students, scholars, and policymakers to the research frontier and provides the tools and context necessary for new research and policy proposals. Martín Uribe and Stephanie Schmitt-Grohé factor in the discipline's latest developments, including major theoretical advances in incorporating financial and nominal frictions into microfounded dynamic models of the open economy, the availability of macro- and microdata for emerging and developed countries, and a revolution in the tools available to simulate and estimate dynamic stochastic models. The authors begin with a canonical general equilibrium model of an open economy and then build levels of complexity through the coverage of important topics such as international business-cycle analysis, financial frictions as drivers and transmitters of business cycles and global crises, sovereign default, pecuniary externalities, involuntary unemployment, optimal macroprudential policy, and the role of nominal rigidities in shaping optimal exchange-rate policy. Based on courses taught at several universities, Open Economy Macroeconomics is an essential resource for students, researchers, and practitioners. Detailed exploration of international business-cycle analysis Coverage of financial frictions as drivers and transmitters of business cycles and global crises Extensive investigation of nominal rigidities and their role in shaping optimal exchange-rate policy Other topics include fixed exchange-rate regimes, involuntary unemployment, optimal macroprudential policy, and sovereign default and debt sustainability Chapters include exercises and replication codes
Book Synopsis Banks, Government Bonds, and Default by : Nicola Gennaioli
Download or read book Banks, Government Bonds, and Default written by Nicola Gennaioli and published by International Monetary Fund. This book was released on 2014-07-08 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.
Book Synopsis Essays on Sovereign Default by : JungJae Park
Download or read book Essays on Sovereign Default written by JungJae Park and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three independent essays on sovereign default. In the first chapter, I develop a quantitative general equilibrium model of sovereign default to account for spillover of default risk across countries. When the collateral constraint for investors binds due to a decrease in the value of collateral, triggered by a high default risk for one country, credit constrained investors ask for liquidity premiums even to countries with normal fundamentals. This increase in the cost of borrowing increases incentives to default for the other countries with normal fundamentals, further constraining investors in obtaining credit through a decrease in the value of collateral. The quantitative results show that this model can generate spillover of default risk across countries. The essay in the second chapter introduces endogenous capital accumulation to a quantitative model of sovereign default based on Eaton and Gersovitz (1981). With a production technology in the model, output and interest rates are jointly determined by the interaction between a sovereign government who can optimally default and foreign creditors taking into account default risk. Adding investment enables the model to generate unique economic dynamics similar to those observed around emerging economies' default crises: (1) Emerging economies' debt crises display a boom-bust pattern. (2) A non-negligible fraction of sovereign defaults occur in good times. The essay in the third chapter explains why emerging economies borrow abroad in foreign currency. We present a two-period model in which foreign lenders offer a small open economy an optimal self-enforcing contract in which borrowing is denominated in borrowers' currency. Taking into account the government's incentive to inflate away the debt, the optimal lending contract provides consumption insurance for the economy in that the contract allows the economy for inflation in bad times but asks for deflation in good times. As the variance of income shocks for the economy increases, it gets more difficult for the contract to satisfy the incentive compatible constraints at the good income state. The numerical results are consistent with the fact that emerging economies with high income volatility suffer from "Original Sin".
Book Synopsis Quantitative Models of Sovereign Debt Crises by : Mark Aguiar
Download or read book Quantitative Models of Sovereign Debt Crises written by Mark Aguiar and published by . This book was released on 2016 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: This chapter is on quantitative models of sovereign debt crises in emerging economies. We interpret debt crises broadly to cover all of the major problems a country can experience while trying to issue new debt, including default, sharp increases in the spread and failed auctions. We examine the spreads on sovereign debt of 20 emerging market economies since 1993 and document the extent to which fluctuations in spreads are driven by country-specific fundamentals, common latent factors and observed global factors. Our findings motivate quantitative models of debt and default with the following features: (i) trend stationary or stochastic growth, (ii) risk averse competitive lenders, (iii) a strategic repayment/borrowing decision, (iv) multi-period debt, (v) a default penalty that includes both a reputation loss and a physical output loss and (vi) rollover defaults. For the quantitative evaluation of the model, we focus on Mexico and carefully discuss the successes and weaknesses of various versions of the model. We close with some thoughts on useful directions for future research.
