TY  - JOUR
AU  - Bocola, Luigi
AU  - Bornstein, Gideon
AU  - Dovis, Alessandro
TI  - Quantitative Sovereign Default Models and the European Debt Crisis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 24981
PY  - 2018
Y2  - August 2018
DO  - 10.3386/w24981
UR  - http://www.nber.org/papers/w24981
L1  - http://www.nber.org/papers/w24981.pdf
N1  - Author contact info:
Luigi Bocola
Department of Economics
Landau 342
Stanford University
579 Serra Mall
Stanford, CA 94305-6072
E-Mail: lbocola@stanford.edu

Gideon Bornstein
20 Washington Rd
Economics Department
JRR Building
Princeton, NJ 08540
United States
Tel: 8477671054
E-Mail: bornstein@princeton.edu

Alessandro Dovis
Department of Economics
University of Pennsylvania
The Ronald O. Perelman Center
 for Political Science and Economics
133 South 36th Street
Philadelphia, PA 19104
E-Mail: adovis@upenn.edu
M1  - published as Luigi Bocola, Alessandro Dovis, Gideon Bornstein. "Quantitative Sovereign Default Models and the European Debt Crisis," in Jordi Galí and Kenneth West, organizers, "NBER International Seminar on Macroeconomics 2018" Journal of International Economics (Elsevier), volume 118 (2019)

AB  - 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.
ER  -