Alvarez, Camilo2021-09-242021-09-242021-06https://hdl.handle.net/11299/224543University of Minnesota Ph.D. dissertation. June 2021. Major: Economics. Advisors: Manuel Amador, Timothy Kehoe. 1 computer file (PDF); x, 69 pages.In the first chapter, I explore a novel pattern in the correlation between default risk and currency depreciation risk for emerging economies. It confirms there is a positive correlation between currency depreciation risk and default risk, but it shows that such correlation disappears in the short horizon, broadly defined as less than three years. The pattern in the correlation is fairly robust to the measures of default risk and currency depreciation risk; as well as for controlling for other factors. I build a small open monetary economy model to take into account a new feature of the trade-offs associated with inflation and future output, and inflation and ability to repay. The model is able to match the untargeted correlation between depreciation risk and default risk for different maturities for Brazil. The model also quantifies the changes in the capital investment decision for Brazil between 1995 and 2010 and finds that Brazil invested around 1.1 % of GDP less because of the inflation risk related to the majority of their debt being in Brazilian Real. In the second chapter of this dissertation, I study how does political turnover risk affects the choice of maturity length by the party in power. I build a model of sovereign debt where there exist political economy forces that do not rely on different types of governments or shocks to the discount factor. The government faces the risk of being replaced by an identical agent while valuing consumption more when they are in power. In a 3-period model, they face the choice of borrowing in either long-term bonds or short-term bonds. I find that this risk causes the agents to behave as if they had quasi hyperbolic discounting preferences, which makes long-term debt more attractive. The main finding is that as political disagreement, the gap between the utility received in power vs out-of-power, grows, the government shifts its debt composition towards long-term bonds. The model is also able to predict similar behavior to that during debt crises. Finally, in the third chapter of this dissertation, I take a critical survey of the literature on how the risk premium affects sovereign debt accumulation and crises. I review several strands of the literature and their finding, both empirical and theoretical, to better understand the strategic environment that governments face. I find that risk aversion plays an important part in the pricing of debt, and can impose serious restrictions on the choices that governments can make. The main takeaway of my review is that while the empirical literature has found great importance in the role of international business cycles and the risk aversion of investors, there is still a lot of unanswered questions in the quantitative side of the literature.enThesis or Dissertation