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Working Paper
Fiscal Stimulus under Sovereign Risk
The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and provide a model of optimal fiscal policy with nominal rigidities and endogenous sovereign default that can account for this empirical pattern. Financing a fiscal stimulus is costly for risky countries and can render countercyclical policies undesirable, even in the presence of large Keynesian stabilization gains. We also show that imposing austerity can backfire by exacerbating the exposure to ...
Working Paper
International Reserves and Rollover Risk
We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for a significant fraction of the holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We ...
Working Paper
Tax Revolts and Sovereign Defaults
Protests and fiscal crises often coincide, with complex causal dynamics at play. We examine the interaction between tax revolts and sovereign risk using a quantitative structural model calibrated to Argentina during the Macri administration (2015-2019). In the model, the government can be controlled by political parties with different preferences for redistribution. Households may opt to revolt in response to the fiscal policies of the ruler. While revolts entail economic costs, they also increase the likelihood of political turnover. Our model mirrors the data by generating political crises ...
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Self-Fulfilling Debt Crises with Long Stagnations
We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the southern European crisis of the early 2010s and the Argentine default of 2001. The source of multiplicity is the one in Calvo (1988). Crucial for multiplicity is an output process characterized by long periods of either high growth or stagnation, which we estimate using data for these countries. We find that expectations-driven debt crises are quantitatively relevant but state dependent, as they occur only during periods of stagnation. Expectations, and how they respond to policy, are the major ...
Working Paper
Duration of Capital Market Exclusion: An Empirical Investigation
This paper investigates the duration of market exclusion following a sovereign default and its resolution. We employ multiple definitions of market access, differentiating between gross versus net borrowing and partial versus full access, to measure the time it takes for countries to regain entry into international capital markets following a sovereign default and resolution. Our findings indicate that market re-access can occur immediately under less stringent definitions but may take several years when more demanding criteria are applied. Middle-income countries typically regain access more ...
Working Paper
Deconstructing Delays in Sovereign Debt Restructuring
Negotiations to restructure sovereign debt are time consuming, taking almost a decade on average to resolve. In this paper, we analyze a class of widely used complete information models of delays in sovereign debt restructuring and show that, despite superficial similarities, there are major differences across models in the driving force for equilibrium delay, the circumstances in which delay occurs, and the efficiency of the debt restructuring process. We focus on three key assumptions. First, if delay has a permanent effect on economic activity in the defaulting country, equilibrium delay ...
Working Paper
Avoiding Sovereign Default Contagion: A Normative Analysis
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 ...
Working Paper
On Wars, Sanctions and Sovereign Default
This paper explores the role of restrictions on the use of international reserves as economic sanctions. We develop a simple model of the strategic game between a sanctioning (creditor) country and a sanctioned (debtor) country. We show how the sanctioning country should impose restrictions optimally, internalizing the geopolitical benefits and the financial costs of a potential default from the sanctioned country.