Corporate-Sovereign Debt Nexus and Externalities

Jun Hee Kwak ()
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Jun Hee Kwak: Department of Economics, Sogang University, Seoul, Korea

No 2306, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: I build a dynamic quantitative model in which both firms and the government can default. Rising endogenous corporate debt increases sovereign default risk, as tax revenues are expected to decrease. Externalities arise because it can be privately optimal but socially suboptimal for firms to default given their limited liability, rationalizing macroprudential interventions in corporate debt markets. I propose a set of such optimal policies that reduce the number of defaulting firms, increase fiscal space, and boost household consumption during financial crises. Contrary to conventional wisdom, countercyclical debt policy can be counterproductive, as the countercyclical policy induces more firmdefaults.

Keywords: Sovereign Debt; Corporate Debt; Default; Macroprudential Policy; Externalities (search for similar items in EconPapers)
JEL-codes: E44 E61 F34 F38 F41 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2023
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:sgo:wpaper:2306

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