American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Learning about Debt Crises
American Economic Journal: Macroeconomics
(pp. 106–34)
Abstract
The European debt crisis presents a challenge to our understanding of the relationship between government bond yields and economic fundamentals. I argue that information frictions are an important missing element and support that claim with evidence on the evolution of GDP forecast errors after 2008. I build a quantitative model of sovereign default where output features rare disasters and agents learn about their realizations. Debt crises coincide with economic depressions and develop gradually while markets update their expectations about future income. Calibrated to the Portuguese economy, the model replicates the comovement of bond spreads and output before and after 2008.Citation
Paluszynski, Radoslaw. 2023. "Learning about Debt Crises." American Economic Journal: Macroeconomics 15 (1): 106–34. DOI: 10.1257/mac.20190189Additional Materials
JEL Classification
- E23 Macroeconomics: Production
- E27 Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- F34 International Lending and Debt Problems
- H63 National Debt; Debt Management; Sovereign Debt