Authors: Juessen, Falko
Linnemann, Ludger
Schabert, Andreas
Title: Default risk premia on government bonds in a quantitative macroeconomic model
Language (ISO): en
Abstract: This paper examines the pricing of public debt in a quantitative macroeconomic model with government default risk. Default may occur due to a fiscal policy that does not preclude a Ponzi game. When a build-up of public debt makes this outcome inevitable, households stop lending such that the government has to default. Interest rates on government bonds reflect expectations of this event. There may exist multiple bond prices compatible with a rational expectations equilibrium. We analyze the conditions under which expected default risk premia can quantitatively rationalize sizeable spreads on public bonds. Sovereign default risk premia turn out to emerge at either very high debt to output ratios, or if the variance of productivity shocks is large.
Subject Headings: asset pricing
fiscal policy
government debt
sovereign default
Issue Date: 2009-12-07T13:34:27Z
Appears in Collections:Sonderforschungsbereich (SFB) 823

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