The Maturity and Payment Schedule of Sovereign Debt / Yan Bai, Seon Tae Kim, Gabriel P. Mihalache.

Format:

Book

Author/Creator:

Bai, Yan.

Contributor:

National Bureau of Economic Research.

Kim, Seon Tae.

Mihalache, Gabriel P.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20896.

NBER working paper series no. w20896

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

This paper studies the maturity and stream of payments of sovereign debt. Using Bloomberg bond data for eleven emerging economies, we document that countries react to crises by issuing debt with shortened maturity but back-load payment schedules. To account for this pattern, we develop a sovereign default model with an endogenous choice of debt maturity and payment schedule. During recessions, the country prefers its payments to be more back-loaded--delaying relatively larger payments--to smooth consumption. However, such a back-loaded schedule is expensive given that later payments carry higher default risk. To reduce borrowing costs, the country optimally shortens maturity. When calibrated to the Brazilian data, the model can rationalize the observed patterns of maturity and payment schedule, as an optimal trade-off between consumption smoothing and endogenous borrowing cost.

Notes:

Print version record

January 2015.