NBER

Xavier Mateos-Planas

School of Economics and Finance
Queen Mary University of London
London, E1 4NS
United Kingdom

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliations: Queen Mary University of London and Centre For Macroeconomics CFM

NBER Working Papers and Publications

July 2019Partial Default
with Cristina Arellano, José-Víctor Ríos-Rull: w26076
In the data sovereign default is always partial and varies in its duration. Debt levels during default episodes initially increase and do not experience reductions upon resolution. This paper presents a theory of sovereign default that replicates these properties, which are absent in standard sovereign default theory. Partial default is a flexible way to raise funds as the sovereign chooses its intensity and duration. Partial default is also costly because it amplifies debt crises as the defaulted debt accumulates and interest rate spreads increase. This theory is capable of rationalizing the large heterogeneity in partial default, its comovements with spreads, debt levels, and output, and the dynamics of debt during default episodes. In our theory, as in the data, debt grows during defaul...

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