Default and interest rate shocks: Renegotiation matters

We develop a sovereign default model with endogenous re-entry to financial markets via debt renegotiation. We use this model to evaluate how shocks to risk-free interest rates trigger default episodes through two channels: borrowing costs and expected renegotiation terms after default. The first...

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Detalles Bibliográficos
Autores principales: Nicolini, Juan Pablo, Almeida, Victor, Esquivel, Carlos, Kehoe, Timothy Jerome
Formato: Documento de trabajo acceptedVersion
Lenguaje:Inglés
Publicado: Universidad Torcuato Di Tella 2024
Materias:
Sovereign Default
Renegociation
Interest rate shocks
Deuda Pública
Public debt
Acceso en línea:https://repositorio.utdt.edu/handle/20.500.13098/12590
https://www.econstor.eu/handle/10419/284000
https://users.econ.umn.edu/~tkehoe/papers/DefaultAndInterestRateShocks.pdf
Aporte de:
Repositorio Digital Universidad Torcuato Di Tella de Universidad Torcuato Di Tella
id I57-R163-20.500.13098-12590
record_format dspace
spelling I57-R163-20.500.13098-125902024-04-13T07:00:10Z Default and interest rate shocks: Renegotiation matters Nicolini, Juan Pablo Almeida, Victor Esquivel, Carlos Kehoe, Timothy Jerome Sovereign Default Renegociation Interest rate shocks Deuda Pública Public debt We develop a sovereign default model with endogenous re-entry to financial markets via debt renegotiation. We use this model to evaluate how shocks to risk-free interest rates trigger default episodes through two channels: borrowing costs and expected renegotiation terms after default. The first channel makes repayment less attractive when risk-free interest rates are high due to higher borrowing costs. The second channel works through the expected subsequent renegotiation process: when risk-free rates are high, lenders are willing to accept a higher haircut in exchange for resuming payments. Thus, high risk-free rates imply better renegotiation terms for a borrower, making default more attractive ex-ante. We calibrate the model to study the 1982 Mexican default, which was preceded by a drastic increase in federal funds rates in the US. We find that the renegotiation process is key for reconciling the model to the widespread narrative that the increase in US interest rates triggered the 1982 default episode. 2024-04-12T20:07:52Z 2024-04-12T20:07:52Z 2023 info:eu-repo/semantics/workingPaper info:eu-repo/semantics/acceptedVersion https://repositorio.utdt.edu/handle/20.500.13098/12590 https://www.econstor.eu/handle/10419/284000 https://users.econ.umn.edu/~tkehoe/papers/DefaultAndInterestRateShocks.pdf eng info:eu-repo/semantics/openAccess https://creativecommons.org/licenses/by-sa/2.5/ar/ 26 p. application/pdf application/pdf Universidad Torcuato Di Tella Rutgers University, Department of Economics University of Minnesota
institution Universidad Torcuato Di Tella
institution_str I-57
repository_str R-163
collection Repositorio Digital Universidad Torcuato Di Tella
language Inglés
orig_language_str_mv eng
topic Sovereign Default
Renegociation
Interest rate shocks
Deuda Pública
Public debt
spellingShingle Sovereign Default
Renegociation
Interest rate shocks
Deuda Pública
Public debt
Nicolini, Juan Pablo
Almeida, Victor
Esquivel, Carlos
Kehoe, Timothy Jerome
Default and interest rate shocks: Renegotiation matters
topic_facet Sovereign Default
Renegociation
Interest rate shocks
Deuda Pública
Public debt
description We develop a sovereign default model with endogenous re-entry to financial markets via debt renegotiation. We use this model to evaluate how shocks to risk-free interest rates trigger default episodes through two channels: borrowing costs and expected renegotiation terms after default. The first channel makes repayment less attractive when risk-free interest rates are high due to higher borrowing costs. The second channel works through the expected subsequent renegotiation process: when risk-free rates are high, lenders are willing to accept a higher haircut in exchange for resuming payments. Thus, high risk-free rates imply better renegotiation terms for a borrower, making default more attractive ex-ante. We calibrate the model to study the 1982 Mexican default, which was preceded by a drastic increase in federal funds rates in the US. We find that the renegotiation process is key for reconciling the model to the widespread narrative that the increase in US interest rates triggered the 1982 default episode.
format Documento de trabajo
acceptedVersion
author Nicolini, Juan Pablo
Almeida, Victor
Esquivel, Carlos
Kehoe, Timothy Jerome
author_facet Nicolini, Juan Pablo
Almeida, Victor
Esquivel, Carlos
Kehoe, Timothy Jerome
author_sort Nicolini, Juan Pablo
title Default and interest rate shocks: Renegotiation matters
title_short Default and interest rate shocks: Renegotiation matters
title_full Default and interest rate shocks: Renegotiation matters
title_fullStr Default and interest rate shocks: Renegotiation matters
title_full_unstemmed Default and interest rate shocks: Renegotiation matters
title_sort default and interest rate shocks: renegotiation matters
publisher Universidad Torcuato Di Tella
publishDate 2024
url https://repositorio.utdt.edu/handle/20.500.13098/12590
https://www.econstor.eu/handle/10419/284000
https://users.econ.umn.edu/~tkehoe/papers/DefaultAndInterestRateShocks.pdf
work_keys_str_mv AT nicolinijuanpablo defaultandinterestrateshocksrenegotiationmatters
AT almeidavictor defaultandinterestrateshocksrenegotiationmatters
AT esquivelcarlos defaultandinterestrateshocksrenegotiationmatters
AT kehoetimothyjerome defaultandinterestrateshocksrenegotiationmatters
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