How does physical capital accumulation affect the decision to default in developing small open economies? We find that, conditional on a level of foreign indebtedness, more capital improves the sovereign's ability to meet its obligations, reducing the likelihood of default and the risk premium....

How does physical capital accumulation affect the decision to default in developing small open economies? We find that, conditional on a level of foreign indebtedness, more capital improves the sovereign?s ability to meet its obligations, reducing the likelihood of default and the risk premium....

More debt forgiveness directly benefits households but indirectly makes credit more expensive. How does aggregate risk affect this trade-off? In a calibrated general equilibrium life-cycle model, aggregate risk reduces the welfare benefit of making default very costly when the costs are borne by...