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The aggregate-demand doom loop: Precautionary motives and the welfare costs of sovereign risk

Francisco Roldán

No 58, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: I examine the role of households' precautionary savings motive in amplifying and propagating changes 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, 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.

Keywords: Sovereign; risk; default; aggregate; demand; precautionary; motives; heterogeneous; agents (search for similar items in EconPapers)
JEL-codes: E21 F34 H63 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2021-04
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-opm
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Working Paper: The Aggregate-Demand Doom Loop: Precautionary Motives and the Welfare Costs of Sovereign Risk (2020) Downloads
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