Working Paper
Avoiding Sovereign Default Contagion: A Normative Analysis
Mallucci, Enrico; De Ferra, Sergio (2020-02-27)
Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard an reduce welfare. Second, we look at the borrowing choices of a global central borrower. We find that it borrows less than individual governments and, as such, defaults become less frequent and welfare increases. Finally, we show that central borrower's policies can be ...
International Finance Discussion Papers , Paper 1275

Working Paper
Sovereign Risk Matters: The Effects of Endogenous Default Risk on the Time-Varying Volatility of Interest Rate Spreads
Mallucci, Enrico; De Ferra, Sergio (2020-03-26)
Emerging market interest rate spreads display substantial time-varying volatility. We show that a baseline model with endogenous sovereign default risk can account for such volatility, even in the absence of shocks to the second moments of the exogenous stochastic variables. In particular, the model features a key non-linearity that allows it to replicate the volatility of interest rate spreads and its comovement with other economic variables. Volatility correlates positively with the level of the spreads and the trade balance and negatively with output and consumption.
International Finance Discussion Papers , Paper 1276

Discussion Paper
Avoiding Sovereign Default Contagion: A Normative Analysis
De Ferra, Sergio; Mallucci, Enrico (2020-09-21)
Sovereign debt crises happen in waves, spreading from one country to the other. The euro-area debt crisis of 2011-12 is a good example of that. Stress in the sovereign debt market quickly spread from Greece and Ireland to Portugal, Spain, and Italy.
FEDS Notes , Paper 2020-09-21