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Essays on Macroeconomics and Sovereign Default

Balke, NL; (2017) Essays on Macroeconomics and Sovereign Default. Doctoral thesis , UCL (University College London).

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This thesis studies sovereign default episodes and debt crises, their causes and consequences for an economy and the optimality of government policies during these times. The first chapter investigates the intratemporal trade-off of a government in debt crises. By introducing distortionary taxation, welfare payments and public spending into a sovereign debt framework, it helps to understand whether austerity or stimuli measures are desirable. In normal times, the government sets procyclical taxes, transfers and public goods, but during debt crises commitment problems motivate austerity. The extent to which countries can credibly commit to fiscal rules is crucial for the design of fiscal policy in a debt crisis. The second chapter analyzes the interaction between government default decisions and labor market outcomes in an environment with persistent unemployment and financial frictions. Sovereign risk impairs bank intermediation through balance sheet effects, worsening the conditions for firms to pre-finance wages and vacancies. This generates a new type of endogenous domestic default cost – the employment cost of default. The persistence of unemployment produces serial defaults and rationalizes high debt-to-GDP ratios. Anticipation effects allow the study of debt crises in addition to outright default episodes. Different labor market policies and alternative bank regulations change the government’s ability to credibly borrow and repay debt. The third chapter makes a theoretical contribution to the sovereign default literature by outlining a novel source for multiple equilibria. In the model, multiplicity arises due to the presence of employment as an additional and privately determined state variable, with neither changing the standard first-mover advantage of the government nor its limited commitment. If confronted with a non-fundamental crisis, policy makers may be able to break bad expectations with repayment guarantees from supranational agencies or fixed floors on debt prices.

Type: Thesis (Doctoral)
Title: Essays on Macroeconomics and Sovereign Default
Event: UCL (University College London)
Language: English
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1559844
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