Sovereign and private default risks over the business cycle

Leo Kaas, Jan Mellert () and Almuth Scholl
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Jan Mellert: Department of Economics, University of Konstanz, Germany

No 2016-09, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: Sovereign debt crises are often accompanied by deep recessions with sharp declines in external credit to the private sector. In a sample of emerging economies we find that both, sovereign and private risk premia are countercyclical. This paper presents a model of a small open economy that accounts for these empirical regularities. It includes private firms which finance a fraction of imports by external debt and are subject to idiosyncratic and aggregate productivity risk, and a government which borrows internationally and taxes firms to finance public expenditures. The model gives rise to endogenous private and sovereign credit spreads and a dynamic feedback mechanism between sovereign and private default risks through the endogenous response of fiscal policy to adverse productivity shocks.

Keywords: Sovereign default; Corporate borrowing; Risk premia (search for similar items in EconPapers)
JEL-codes: E32 E62 F34 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-09-19
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Sovereign and private default risks over the business cycle (2020)
Working Paper: Sovereign and Private Default Risks over the Business Cycle (2016)
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