Sovereign defaults in emerging economies lead to interest rate spikes and recessions.
Sovereign defaults in emerging economies often lead to high interest rates and severe recessions. A new model shows that default risk is higher during economic downturns because borrowers find it harder to repay debts. This model accurately predicts economic cycles in Argentina, showing that interest rates are more volatile, consumption fluctuates more than output, and output is negatively linked to interest rates and trade balance.