Default Risk, Sectoral Reallocation, and Persistent Recessions

Cristina Arellano, Yan Bai and Gabriel Mihalache

Department of Economics Working Papers from Stony Brook University, Department of Economics

Abstract: Sovereign debt crises are associated with large and persistent declines in economic activity, disproportionately so for nontradable sectors. This paper documents this pattern using Spanish data and builds a two-sector dynamic quantitative model of sovereign default with capital accumulation. Recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk. An adverse domestic shock increases the likelihood of default, limits capital inflows, and thus restricts the ability of the economy to exploit investment opportunities. The economy responds by reducing investment and reallocating capital toward the traded sector to support debt service payments. The real exchange rate depreciates, a reflection of the scarcity of traded goods. We find that these mechanisms are quantitatively important for rationalizing the experience of Spain during the recent debt crisis.

Date: 2017
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.stonybrook.edu/commcms/economics/research/papers/2017/ABM_1710.pdf (application/pdf)

Related works:
Journal Article: Default risk, sectoral reallocation, and persistent recessions (2018)
Chapter: Default Risk, Sectoral Reallocation, and Persistent Recessions (2017)
Working Paper: Default Risk, Sectoral Reallocation and Persistent Recessions (2017)
Working Paper: Default Risk, Sectoral Reallocation, and Persistent Recessions (2017)
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:nys:sunysb:17-10

Access Statistics for this paper

More papers in Department of Economics Working Papers from Stony Brook University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().