International default risk boosts welfare and asset pricing in global debt markets.
The article explores how default risk affects borrowing between people in the same country and across different countries. It suggests that when there isn't perfect enforcement of contracts within a country, sharing risk internationally can lead to better outcomes. The study also shows that in countries with limited access to global financial markets, the domestic interest rate is determined by the highest rate of substitution. This challenges the idea that lower interest rates always encourage repayment in situations of financial crisis.