Opportunistic sovereign default under a credible peg

Hernandez J. · Journal of Economic Dynamics and Control (2026) · DOI: 10.1016/j.jedc.2026.105401

Resumen

In the African Financial Community (CFA) franc zones, a credible euro peg coexists with external debt denominated largely in U.S. dollars: euro–dollar fluctuations, exogenous to these small economies, directly raise the domestic-currency burden of debt. Panel regressions show that such depreciations raise sovereign default intensity by roughly 9%. In these same high-default years, consumption does not fall—evidence against the insurance motive of standard default models. I explain both facts by extending the partial default framework of Arellano et al. (2023) with foreign-currency debt, exogenous exchange rate shocks, and government heterogeneity. Exogeneity changes the nature of default: governments default not for insurance but opportunistically, exploiting the valuation gap between the higher debt burden and the higher revenue from new borrowing, generating a short-run rise in consumption. A policy counterfactual finds leaving for a self-managed dollar peg welfare-neutral on the financial side: opportunistic default insures the mismatch so effectively that a country profits from devaluations whatever their source, so the arrangement's value lies not in shielding the debt but in the exogenous-devaluation environment that makes default opportunistic.

Instituciones: Universidad del Pacífico