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Self-Fulfilling Debt Crises with Long Stagnations

Staff Report 659 | Published June 18, 2024

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Joao Ayres Inter-American Development Bank
Gaston Navarro Federal Reserve Board
Juan Pablo Nicolini Senior Research Economist and Universidad Torcuato Di Tella
Pedro Teles Banco de Portugal, Catolica Lisbon SBE, and CEPR
Self-Fulfilling Debt Crises with Long Stagnations


We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the southern European crisis of the early 2010s and the Argentine default of 2001. The source of multiplicity is the one in Calvo (1988). Crucial for multiplicity is an output process characterized by long periods of either high growth or stagnation, which we estimate using data for these countries. We find that expectations-driven debt crises are quantitatively relevant but state dependent, as they occur only during periods of stagnation. Expectations, and how they respond to policy, are the major factors explaining default rates and credit spread differences between Spain and Argentina.

An earlier version of this Staff Report circulated as [Working Paper 757](