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Sovereign Risk and the Macroeconomy.

Record Type:	Electronic resources : Monograph/item
Title/Author:	Sovereign Risk and the Macroeconomy./
Author:	Moretti, Matias.
Published:	Ann Arbor : ProQuest Dissertations & Theses, : 2021,
Description:	302 p.
Notes:	Source: Dissertations Abstracts International, Volume: 83-02, Section: A.
Contained By:	Dissertations Abstracts International83-02A.
Subject:	Political science. -
Online resource:	http://pqdd.sinica.edu.tw/twdaoapp/servlet/advanced?query=28323869
ISBN:	9798534676297

Sovereign Risk and the Macroeconomy.
Moretti, Matias.

Sovereign Risk and the Macroeconomy. - Ann Arbor : ProQuest Dissertations & Theses, 2021 - 302 p.

Source: Dissertations Abstracts International, Volume: 83-02, Section: A.

Thesis (Ph.D.)--New York University, 2021.

This item must not be sold to any third party vendors.

In this dissertation, I study the effects of sovereign risk on the macroeconomy. In the first chapter, I analyze the interaction between sovereign and corporate risk and show how this interaction can amplify the size and persistence of sovereign debt crises. In the second chapter, I study the lack of financial innovation in sovereign debt market. In the third chapter, I quantify the importance of a government's reputation in the pricing of sovereign risk.In the first chapter of my dissertation, I study the macroeconomic effects of increases in corporate risk around sovereign debt crises. I use a heteroskedasticity-based approach to estimate the causal effect of sovereign risk on the credit risk of non-financial firms. Using Italian firm-level data for the 2010-2012 European debt crisis, I find that sovereign risk accounts for almost a third of the total increase in corporate risk and that this effect is stronger for riskier firms. I use bank-level data to show that the bank-lending channel plays an important role in this transmission. In particular, I find that banks with higher sovereign debt holdings exhibit a larger increase in their corporate non-performing loans. Taken together, these results imply that an increase in sovereign risk thus weakens banks' balance sheets directly, by decreasing the value of government bonds held by banks, and indirectly, through banks' exposures to non-financial firms. To study the macroeconomic implications of this mechanism, I formulate a heterogeneous-firms model where the banking sector transmits sovereign risk to firms. I show that the model is able to match the empirical relationships estimated from Italian data. In a counterfactual analysis, I find that corporate risk represents a quantitatively important feedback mechanism that further deteriorates banks' balance sheets, amplifying the size and persistence of a sovereign debt crisis. I use this framework to study different policies that can mitigate the negative effects of sovereign risk and identify efficiency gains from policies that exploit firms' heterogeneous reactions to increases in sovereign risk.In the second chapter, I study the benefits and costs associated with the introduction of new types of sovereign debt instruments. By issuing state-contingent bonds, a sovereign government can better insure the economy against adverse shocks. Despite these benefits, issuances of state-contingent sovereign bonds have been limited both in quantity and frequency. One of the reasons argued in the literature is that these bonds would carry a sizable liquidity premium given the smaller size of their market. In this chapter, I quantify how this liquidity premium erodes the potential benefits associated with the introduction of a new type of debt instrument: GDP-linked bonds. I incorporate search frictions into a standard incomplete-markets model with limited commitment and exogenous costs of default. I assume free entry of dealers together with an increasing-returns-to-scale matching technology so that the liquidity of GDP-linked debt is related to the size of its secondary market. I show that as long as the amount outstanding of GDP-linked bonds is small, search frictions are more severe for investors because only a few dealers enter the market. Larger search frictions lead to higher bid-ask spreads and to a larger liquidity premium at issuance, increasing the financing costs of the government. As a result, welfare gains are reduced by more than 50%, especially when the amount issued is small.In the third chapter, coauthored with Juan Martin Morelli, we quantify the effects of a government's reputation on sovereign spreads. We do so by developing a reputational model of default and by providing new empirical evidence on the link between reputation and sovereign spreads. We focus on policies that are not perfectly observable and allow the government to indirectly dilute its real stock of debt, without the need of an outright default. Although these policies imply a partial default, the government keeps having access to debt markets. We can then use the information transmitted by those policies to quantify the effects of government's reputation on its current borrowing costs. Focusing on Argentina's 2007 systematic misreport of inflation as a case study, we find that an indirect partial default on inflation-linked bonds significantly increased the spreads of nominal bonds. Using those estimates, we then calibrate a quantitative model to study the long-term effects of reputation. We show that the model is able to replicate the evolution of spreads for Argentina in 2007-2010 and the observed decoupling from other countries in the region.

ISBN: 9798534676297Subjects--Topical Terms:

528916
Political science.
Subjects--Index Terms:

Corporate risk

Sovereign Risk and the Macroeconomy.
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100 1 $a Moretti, Matias. $3 3691932
245 1 0 $a Sovereign Risk and the Macroeconomy.
260 1 $a Ann Arbor : $b ProQuest Dissertations & Theses, $c 2021
300 $a 302 p.
500 $a Source: Dissertations Abstracts International, Volume: 83-02, Section: A.
500 $a Advisor: Lagos, Ricardo.
502 $a Thesis (Ph.D.)--New York University, 2021.
506 $a This item must not be sold to any third party vendors.
520 $a In this dissertation, I study the effects of sovereign risk on the macroeconomy. In the first chapter, I analyze the interaction between sovereign and corporate risk and show how this interaction can amplify the size and persistence of sovereign debt crises. In the second chapter, I study the lack of financial innovation in sovereign debt market. In the third chapter, I quantify the importance of a government's reputation in the pricing of sovereign risk.In the first chapter of my dissertation, I study the macroeconomic effects of increases in corporate risk around sovereign debt crises. I use a heteroskedasticity-based approach to estimate the causal effect of sovereign risk on the credit risk of non-financial firms. Using Italian firm-level data for the 2010-2012 European debt crisis, I find that sovereign risk accounts for almost a third of the total increase in corporate risk and that this effect is stronger for riskier firms. I use bank-level data to show that the bank-lending channel plays an important role in this transmission. In particular, I find that banks with higher sovereign debt holdings exhibit a larger increase in their corporate non-performing loans. Taken together, these results imply that an increase in sovereign risk thus weakens banks' balance sheets directly, by decreasing the value of government bonds held by banks, and indirectly, through banks' exposures to non-financial firms. To study the macroeconomic implications of this mechanism, I formulate a heterogeneous-firms model where the banking sector transmits sovereign risk to firms. I show that the model is able to match the empirical relationships estimated from Italian data. In a counterfactual analysis, I find that corporate risk represents a quantitatively important feedback mechanism that further deteriorates banks' balance sheets, amplifying the size and persistence of a sovereign debt crisis. I use this framework to study different policies that can mitigate the negative effects of sovereign risk and identify efficiency gains from policies that exploit firms' heterogeneous reactions to increases in sovereign risk.In the second chapter, I study the benefits and costs associated with the introduction of new types of sovereign debt instruments. By issuing state-contingent bonds, a sovereign government can better insure the economy against adverse shocks. Despite these benefits, issuances of state-contingent sovereign bonds have been limited both in quantity and frequency. One of the reasons argued in the literature is that these bonds would carry a sizable liquidity premium given the smaller size of their market. In this chapter, I quantify how this liquidity premium erodes the potential benefits associated with the introduction of a new type of debt instrument: GDP-linked bonds. I incorporate search frictions into a standard incomplete-markets model with limited commitment and exogenous costs of default. I assume free entry of dealers together with an increasing-returns-to-scale matching technology so that the liquidity of GDP-linked debt is related to the size of its secondary market. I show that as long as the amount outstanding of GDP-linked bonds is small, search frictions are more severe for investors because only a few dealers enter the market. Larger search frictions lead to higher bid-ask spreads and to a larger liquidity premium at issuance, increasing the financing costs of the government. As a result, welfare gains are reduced by more than 50%, especially when the amount issued is small.In the third chapter, coauthored with Juan Martin Morelli, we quantify the effects of a government's reputation on sovereign spreads. We do so by developing a reputational model of default and by providing new empirical evidence on the link between reputation and sovereign spreads. We focus on policies that are not perfectly observable and allow the government to indirectly dilute its real stock of debt, without the need of an outright default. Although these policies imply a partial default, the government keeps having access to debt markets. We can then use the information transmitted by those policies to quantify the effects of government's reputation on its current borrowing costs. Focusing on Argentina's 2007 systematic misreport of inflation as a case study, we find that an indirect partial default on inflation-linked bonds significantly increased the spreads of nominal bonds. Using those estimates, we then calibrate a quantitative model to study the long-term effects of reputation. We show that the model is able to replicate the evolution of spreads for Argentina in 2007-2010 and the observed decoupling from other countries in the region.
590 $a School code: 0146.
650 4 $a Political science. $3 528916
650 4 $a Sensitivity analysis. $3 3560752
650 4 $a Calibration. $3 2068745
650 4 $a Quantitative analysis. $3 3452583
650 4 $a Reputations. $3 3562920
653 $a Corporate risk
653 $a Financial innovation
653 $a Government's reputation
653 $a Sovereign risk
690 $a 0501
690 $a 0615
690 $a 0770
710 2 $a New York University. $b Economics. $3 1032403
773 0 $t Dissertations Abstracts International $g 83-02A.
790 $a 0146
791 $a Ph.D.
792 $a 2021
793 $a English
856 4 0 $u http://pqdd.sinica.edu.tw/twdaoapp/servlet/advanced?query=28323869