Rare Disasters, Financial Development, and Sovereign Debt
Aug 20, 2018
We study the implications of the interaction between rare disasters and financial development for sovereign debt markets. In our model, countries vary in their financial development, by which we mean the extent to which shocks can be hedged in inter- national capital markets. The model predicts that low levels of financial development generate key empirical features of sovereign debt in emerging economies: high credit spreads associated with lower debt-to-GDP ratios than those of developed countries.