TY - BOOK ID - 84543290 TI - Persistent Gaps, Volatility Types, and Default Traps AU - Fostel, Ana. AU - Catão, Luis. AU - Kapur, Sandeep. AU - International Monetary Fund. PY - 2007 SN - 1462300332 1452723885 1282447149 1451911653 9786613820914 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Exports and Imports KW - Investments: Bonds KW - Macroeconomics KW - Production and Operations Management KW - General Financial Markets: General (includes Measurement and Data) KW - Price Level KW - Inflation KW - Deflation KW - International Lending and Debt Problems KW - Macroeconomics: Production KW - Investment & securities KW - International economics KW - Asset prices KW - Debt default KW - Bonds KW - Output gap KW - Sovereign bonds KW - Prices KW - Debts, External KW - Production KW - Economic theory KW - United States KW - Fiscal policy KW - Budget deficits KW - Finance, Public KW - Econometric models. UR - https://www.unicat.be/uniCat?func=search&query=sysid:84543290 AB - We show that cross-country differences in the underlying volatility and persistence of macroeconomic shocks help explain two historical regularities in sovereign borrowing: the existence of "vicious" circles of borrowing-and-default ("default traps"), as well as the fact that recalcitrant sovereigns typically face higher interest spreads on future loans rather than outright market exclusion. We do so in a simple model where output persistence is coupled with asymmetric information between borrowers and lenders about the borrower's output process, implying that a decision to default reveals valuable information to lenders about the borrower's future output path. Using a broad cross-country database spanning over a century, we provide econometric evidence corroborating the model's main predictions-namely, that countries with higher output persistence and conditional volatility of transient shocks face higher spreads and thus fall into default traps more easily, whereas higher volatility of permanent output tends to dampen these effects. ER -