We propose a modification to a baseline sovereign default framework that allows us to quantify the importance of debt dilution in accounting for the level and volatility of the interest rate spread paid by sovereigns. We measure the effects of debt dilution by comparing the simulations of the...

We measure the effects of debt dilution on sovereign default risk and show how these effects can be mitigated with debt contracts promising borrowing-contingent payments. First, we calibrate a baseline model à la Eaton and Gersovitz (1981) to match features of the data. In this model, bonds'...

This paper extends the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long-duration bonds. This contrasts with previous studies, which assume the government can borrow using bonds that mature after one quarter. We show...