The Macroeconomic Consequences of Sovereign and Private Default Risks
Coordinator: Prof. Dr. Leo Kaas, Prof. Dr. Almuth Scholl
Participants: Maren Frömel
Throughout history, advanced and emerging economies have been confronted by a multitude of sovereign debt and financial crises. The dramatic surge in public debt in many economies triggered by the recent financial crisis raises the question of the stability and sustainability, and it attracts notice to the role of default risk as source of macroeconomic volatility. The objective of this research project is to understand the theoretical mechanisms that explain the impact of sovereign and private default risks and their interactions on macroeconomic outcomes. To this end, we incorporate debt repudiation in stochastic dynamic general equilibrium models of closed and open economies.
The project is organized along three topics. First, we analyze the international transmission of fiscal policy in the presence of default risks and study the implications for international risk sharing, capital flows and trade. Second, we explore the role of increasing public debt for private credit arrangements and investment under alternative contract enforcement mechanisms. Third, we study the spill-over effects between sovereign and private default events and analyze the consequences for macroeconomic activity.
- Azariadis, C., Kaas, L., and Wen, Y. (2014), Self-Fulfilling Credit Cycles, Working Paper (Earlier version: Federal Reserve Bank of St. Louis Working Paper 2012-047A).
- Fink, F., and Scholl, A. (2014), A Quantitative Model of Sovereign Debt, Bailouts and Conditionality, Working Paper (Earlier version: Working Paper No. 2011-46, Department of Economics, University of Konstanz).
- Froemel, M. (2014), Imperfect Financial Markets and the Cyclicality of Social Spending, Working Paper No. 2014-11, Department of Economics, University of Konstanz.
- Kaas, L., Mellert, J., and Scholl, A. (2014), Sovereign and Private Default Risks over the Business Cycle, Working paper, University of Konstanz.
- Scholl, A. (2013), Debt Relief for Poor Countries: Conditionality and Effectiveness, Working Paper No. 2013-23, Department of Economics, University of Konstanz.