TY  - JOUR
AU  - Aguiar,Mark
AU  - Gopinath,Gita
TI  - Defaultable Debt, Interest Rates and the Current Account
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10731
PY  - 2004
Y2  - September 2004
UR  - http://www.nber.org/papers/w10731
L1  - http://www.nber.org/papers/w10731.pdf
N1  - Author contact info:
Mark A. Aguiar
Department of Economics
Princeton University
Fisher Hall
Princeton, NJ 08544-1021
E-Mail: mark@markaguiar.com

Gita Gopinath
Department of Economics
Harvard University
1875 Cambridge Street
Littauer 206
Cambridge, MA 02138
Tel: 617/495-8161
Fax: 617/495-7730
E-Mail: gopinath@harvard.edu
AB  - World capital markets have experienced large scale sovereign defaults on a number of occasions, the most recent being Argentina's default in 2002. In this paper we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates as compared to slumps. Our ability to match these facts within the framework of an otherwise standard business cycle model with endogenous default relies on the importance of a stochastic trend in emerging markets.
ER  -