Maturity, Indebtedness, and Default Risk
WP 11-33 - In this paper, the authors advance the theory and computation of Eaton-Gersovitz style models of sovereign debt by incorporating long-term debt and proving the existence of an equilibrium price function with the property that the interest rate on debt is increasing in the amount borrowed and implementing a novel method of computing the equilibrium accurately.
Supersedes Working Paper 10-12 - Maturity, Indebtedness, and Default Risk
Using Argentina as a test case, they show that incorporating long-term debt allows the model to match the average external debt-to-output ratio, average spread on external debt, the standard deviation of spreads and simultaneously improve upon the model's ability to account for Argentina's other cyclical facts.
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