Economic Quarterly

2007

 

Summer 2007

Quantitative Models of Sovereign Default and the Threat of Financial Exclusion

Juan Carlos Hatchondo, Leonardo Martinez and Horacio Sapriza

The article 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 and compares them with those of the same model without the exclusion punishment. Both models build on the framework studied in Aguiar and Gopinath (2006). The article 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, and net exports are not fundamentally different in the models with and without exclusion.

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