Review of Financial Studies 2026
Sovereign Default and the Decline in Interest Rates*
Abstract
Sovereign debt yields have undergone a historic decline over the last half century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk. We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth. Calibrations of the model post-COVID suggest that sovereign default risk may have returned.
- DOI
- 10.1093/rfs/hhag025
- Language
- en
- Sources
- crossref