Date of Award

1-1-2023

Language

English

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

College/School/Department

Department of Economics

Content Description

1 online resource (ix, 96 pages) : illustrations (some color)

Dissertation/Thesis Chair

Betty Daniel

Committee Members

Yue Li, Benjamin Griffy

Keywords

International Economics, Macroeconomics, Sovereign Default, Default (Finance), Debts, Public, Interest rates, Wages

Subject Categories

Economics

Abstract

The first chapter examines the cyclicality of debt in standard quantitative sovereign default model, the strategic default model. The standard strategic default model has been a canonical model to explain high consumption volatility in emerging markets with default risks, such as Argentina in 2001. These emerging markets with high default risks can be characterized by exhibiting procyclical debt behavior and high level of mean and volatility of interest rate spreads. However, the notion of only emerging markets default has changed, since the Southern European debt crisis starting in 2010. Greece defaulted and other countries such as Italy, Spain, Portugal, and Ireland had debt crisis. Unlike the emerging market economies, these countries exhibited countercyclical debt and consumption less volatile than income. Then, can a standard strategic default model explain the default in advanced economies? We choose Greece as a reference country and attempt to match the Greek data leading up to a debt crisis. We find that the standard strategic default model is not capable of generating a countercyclical debt, therefore, leading to consumption more volatile than income. The experiment results suggest that the only way to make debt countercyclical in the standard strategic model is to raise the magnitude of patience parameter. However, doing so leads to very little borrowing and close to no defaults generated by the model, which would not be an appropriate model for explaining default events.

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