Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/284000 
Year of Publication: 
2024
Series/Report no.: 
Working Paper No. 2024-05
Publisher: 
Rutgers University, Department of Economics, New Brunswick, NJ
Abstract: 
We develop a sovereign default model with debt renegotiation in which interest-rate shocks affect default incentives through two mechanisms. The first is the standard mechanism through which higher rates tighten the budget constraint. The second rests on how risk-free rates affect lenders' opportunity cost of holding delinquent debt. When rates are high, this cost increases and lenders accept larger haircuts, which makes default more attractive ex-ante. We use the model to study the 1982 Mexican default, which followed a large increase in US interest rates. Our novel renegotiation mechanism is key for reconciling sovereign default models with the narrative that US monetary tightening triggered the crisis.
Subjects: 
Sovereign default
Renegotiation
Interest rate shocks
JEL: 
F34
F41
Document Type: 
Working Paper

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