Popov, Sergey V. and Wiczer, David G. (2009): Equilibrium sovereign default with endogenous exchange rate depreciation.
Download (219kB) | Preview
Sovereign default is often associated with disturbances in a country’s trade relations. Often the defaulter’s currency depreciates while trade volume falls drastically. This paper develops a model to incorporate real depreciation along with sovereign bankruptcy. The exchange rate is determined in equilibrium as the relative price of imports. We demonstrate that a default episode can imply up to a 30% real depreciation. This matches the depreciations observed in crisis events for developing countries. We argue that much of the exchange rate movement is explained by market clearing adjustments to trade disruptions in the aftermath of default.
|Item Type:||MPRA Paper|
|Original Title:||Equilibrium sovereign default with endogenous exchange rate depreciation|
|Keywords:||Endogenous default, endogenous exchange rate, trade balance.|
|Subjects:||F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
F - International Economics > F1 - Trade > F11 - Neoclassical Models of Trade
F - International Economics > F1 - Trade > F17 - Trade Forecasting and Simulation
|Depositing User:||Sergey Popov|
|Date Deposited:||26. Nov 2009 01:54|
|Last Modified:||13. Feb 2013 18:27|
Aguiar, M. and G. Gopinath (2006): “Defaultable Debt, Interest Rates and the Current Account,” Journal of International Economics, 69, 64–83.
Antras, P. (2003): “Firms, Contracts, And Trade Structure,” The Quarterly Journal of Economics, 118, 1375–1418.
Arellano, C. (2008): “Default Risk and Income Fluctuations in Emerging Economies,” American Economic Review, 98, 690–712.
Arteta, C. and G. Hale (2008): “Sovereign debt crises and credit to the private sector,” Journal of International Economics, 74, 53 – 69.
Beers, D. T. and J. Chambers (2003): “Sovereign Defaults: Heading Lower into 2004,” Research Report 09/2003, Standard and Poor’s RatingsDirect.
Bi, R. (2008): “Beneficial Delays in Debt Restructuring Negotiations,” IMFWorking Papers 08/38, International Monetary Fund.
Bulow, J. and K. Rogoff (1989): “Sovereign Debt: Is to Forgive to Forget?” American Economic Review, 79, 43–50.
Chari, V. V., P. J. Kehoe, and E. R. McGrattan (2002): “Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?” Review of Economic Studies, 69, 533–63.
Chatterjee, S., D. Corbae, M. Nakajima, and J.-V. Rios-Rull (2007): “A Quantitative Theory of Unsecured Consumer Credit with Risk of Default,” Econometrica, 75, 1525 – 1589.
Chatterjee, S. and B. Eyigungor (2009): “Maturity, indebtedness, and default risk,” Tech. rep.
Das, S., M. J. Roberts, and J. R. Tybout (2001): “Market Entry Costs, Producer Heterogeneity, and Export Dynamics,” Nber working papers, National Bureau of Economic Research, Inc.
De Paoli, B. and G. Hoggarth (2006): “Costs of Sovereign Default,” Bank of England Quarterly Bulletin, Fall 2006.
Eaton, J. and M. Gersovitz (1981): “Debt with Potential Repudiation: Theoretical and Empirical Analysis,” Review of Economic Studies, 48, 289 – 309.
Hodrick, R. J. and E. C. Prescott (1997): “Postwar U.S. Business Cycles: An Empirical Investigation,” Journal of Money, Credit and Banking, 29, 1–16.
Hummels, D. (2001): “Time as a trade barrier,” Research report, Purdue University.
Hummels, D. and P. J. Klenow (2005): “The Variety and Quality of a Nation’s Exports,” American Economic Review, 95, 704–723.
Livshits, I., J. MacGee, and M. Tertilt (2007): “Consumer Bankruptcy: A Fresh Start,” American Economic Review, 97, 402–418.
Rose, A. K. (2005): “One Reason Countries Pay Their Debts: Renegotiation and International Trade,” Journal of Development Economics, 77, 189 – 206.
Ruhl, K. J. (2003): “Solving the Elasticity Puzzle in International Economics,” mimeo, University of Minnesota.
Sandleris, G., G. R. Gelos, and R. Sahay (2004): “Sovereign Borrowing by Developing Countries: What Determines Market Access?” IMF Working Papers 04/221, International Monetary Fund.
Todd, W. F. (1991): “A History of International Lending,” in Research in Financial Services, ed. by G. Kaufman, Greenwich, Conn.: JAI Press, vol. 3, 201–289.
Tomz, M. (2007): Reputation and International Cooperation: Sovereign Debt across Three Centuries, Princeton, NJ: Princeton University Press.
Tomz, M. and M. L. J. Wright (2007): “Do Countries Default in Bad Times?” Journal of the European Economic Association, 5, 352–360.
Wright, M. L. J. (2001): “Limited commitment: Theory with applications to repudiation risk,” Ph.D. thesis, University of Chicago.
Yue, V. Z. (2005): “Sovereign Default and Debt Renegotiation,” 2005 Meeting Papers 138, Society for Economic Dynamics.