Browsing by Subject "Default"
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Item Essays in macroeconomics and finance.(2009-12) Piazza, RobertoThis thesis proposes two studies that highlight the relevance of financial markets imperfections for aggregate macroeconomic fluctuations and growth. In Part I, I show that financial innovation has increased diversification opportunities and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies relative to passive (less uninformed) strategies. What are the consequences of this phenomenon? I study an economy with linear production technologies, some more risky than others. Investors can use low quality public information or collect high quality, but costly, private information. Information helps avoiding excessively risky investments. Financial innovation lowers the incentives for private information collection and deteriorates public information: the economy invests more often in excessively risky technologies. This changes the business cycle properties and can reduce welfare by increasing the likelihood of ``liquidation crises". In Part II, I start from the observation that in emerging economies periods of rapid growth and large capital inflows can be followed by sudden stops and financial crises. The chapter, abstracting from business cycles aspects, shows that the process of long run growth can be a key element in accounting for these facts. I study a growth model for a small open economy where decreasing marginal returns to capital appear only after the country has reached a threshold level of development, which is uncertain. Limited enforceability of contracts allows default on international debt. International investors can optimally choose to stop lending when the appearance of decreasing marginal returns slows down the growth of the economy, which then defaults and enters a financial crisis.Item Essays on macroeconomics(2013-07) Guo, SiThe dissertation includes two essays. In the first essay I try to explain the slow recovery of the U.S. economy after the 2008-2009 recession. I develop a theory in which the slow recovery is due to continuing weak consumption demand arising from slowly resolved aggregate uncertainty. An exogenous belief shock creates uncertainty about firms' credit availability. This translates into income uncertainty at the household level because firms have to borrow from banks in order to hire workers. In response, household demand is low, which in turn causes firms to borrow little and produce little. This low level of economic activity impedes the resolution of uncertainty regarding credit availability. Therefore, the economy stagnates with high uncertainty, low demand, and low output, even though there is no shock to fundamentals. The resolution of uncertainty is not efficient because households do not fully internalize the effect of increasing their own demand on improving the quality of information. This leaves room for government intervention. Quantitatively my model generates a slow recovery, which is comparable to U.S. employment data. Model pre- dictions are also consistent with U.S. county level data: counties with cheaper access to household credit have higher employment but all counties recover at the same rate. In the second essay, which is co-authored with Yun Pei, we try to understand the impact of sovereign default on the lending countries. We develop a model in which banks in the lending countries can buy foreign sovereign bond, provide loan to domestic firms and borrow from domestic households. We find that a sovereign default in foreign countries can result in an output drop in the lending countries, because the default can worsen the balance sheet of banks. Therefore default risk in foreign countries can be transmitted to output risk in the lending countries. However, this does not mean that the governments in the lending countries should limit the purchase of foreign sovereign bond. A tax on the purchase of sovereign bond reduces the output fluctuation but also decreases the welfare of domestic bankers and households.Item Essays on Sovereign Default with Information Frictions(2022-06) Fourakis, SteliosThis dissertation consists of three chapters. In the first chapter, I build a flexible theoretical model of sovereign borrowing, default, and renegotiation with borrower reputation. There is asymmetric information about the government's ``type'', and reputation is the market belief that it is ``responsible'' and therefore less likely to default. Every government decision informs market beliefs about this ``type''. I calibrate the model using data on how countries' credit histories affect the prices they face. Using the model, I show that countries that have recently defaulted have poor reputations because they rapidly run up their debts prior to default, not because the default decision itself is revealing. I also show that, for countries facing non-trivial levels of default risk, the reputational costs of default are less than $0.2$ basis points of consumption. I then validate the model by showing that its predictions about the effects of borrowing behavior on interest rate spreads through the reputation channel are borne out in the data. Finally, I show that transparency initiatives and audit programs have significant, negative implications for welfare, because they weaken the signaling mechanisms that prevent, to some extent, overborrowing by the government. In the second chapter, I document that, during the height of the Eurozone Debt Crisis in Spain, 1.) Spanish government bonds became substantially less liquid and less traded on secondary markets, 2.) the first appearance of this phenomenon lagged far behind the initial jump in interest rate spreads in late 2008, and 3.) it persisted throughout the period of peak interest rate spreads and only subsided after the worst of the crisis had passed. I argue that these facts are related and best explained by a model of sovereign default that features secondary markets in which it is possible that some traders have private information. I then build a model in which some traders have private information about the country's future economic conditions and show that this allows the model to reproduce both the delayed reaction of bid-ask spreads as well as their peak and behavior during the height of the crisis. Using the model, I measure the losses to investors associated with variation in liquidity during debt crises. Finally, I validate the model by showing that the model's predicted relationship between current, realized bid-ask spreads and future values of GDP allows me to forecast GDP significantly better than a standard, benchmark forecast. In the third chapter, I document that, during the Eurozone Debt Crises, 1.) forecasts of output were persistently biased upwards, 2.) the afflicted countries all saw steep increases in their government debt to GDP ratios and their external government debt to GDP ratios, and 3.) spreads reacted slowly to these increases. I argue that these three facts are related and connect them through a model of sovereign default which features incomplete information with respect to the persistent component of output. I then show that the inclusion of information imperfections allows the model to produce patterns during and before crises which better match the patterns in the data than the benchmark model.