The Aggregate-Demand Doom Loop: Precautionary Motives and the Welfare Costs of Sovereign Risk

Francisco Roldán

American Economic Journal: Macroeconomics, 2025, vol. 17, issue 3, 160-204

Abstract: I examine the role of households' precautionary savings motive in amplifying and propagating movements in sovereign spreads. I study this mechanism in a model where the government of a small open economy borrows from foreigners, but the debt is then partially held by heterogeneous domestic savers. In a calibration to Spain in the 2000s, I find that default risk accounts for about half of the output contraction. More generally, sovereign risk exacerbates volatility in consumption over time and across agents, creating large and unequal welfare costs even if default does not materialize.

JEL-codes: E21 F41 G51 H63 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/mac.20220248 (application/pdf)
https://doi.org/10.3886/E197281V1 (text/html)
https://www.aeaweb.org/articles/materials/23437 (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmac:v:17:y:2025:i:3:p:160-204

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/mac.20220248

Access Statistics for this article

American Economic Journal: Macroeconomics is currently edited by Simon Gilchrist

More articles in American Economic Journal: Macroeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().