|Speaker:||Xavier Mateos-Planas, Queen Mary University|
|Date: ||Friday 7 March 2014|
|Location: ||Matrix Lecture Theatre, Building One|
In this paper we produce a theory of partial default applicable to sovereign debt. We document that, contrary to standard theory, countries always default on only part of their debt and continue to borrow while having debt on arrears. In our model default acts as expensive debt which curtails the countries' productive capabilities. Debt in arrears is carried until it is finally repaid. The model is consistent with the large heterogeneity in defaults observed across countries and years.