Gabriel P. Mihalache
S633, Social and Behavioral Sciences Bld.
Department of Economics
Stony Brook University
Stony Brook, NY 11794
Institutional Affiliation: Stony Brook University
NBER Working Papers and Publications
|January 2020||Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default)|
with Cristina Arellano, Yan Bai: w26671
This paper develops a New Keynesian model with sovereign default risk (NK-Default). We focus on the interaction between monetary policy, conducted according to an interest rate rule that targets inflation, and external defaultable debt issued by the government. Monetary policy and default risk interact since both affect domestic consumption, production, and inflation. We find that default risk amplifies monetary frictions and generates a tension for monetary policy, which increases the volatility of inflation and nominal rates. These monetary frictions in turn discipline sovereign borrowing, slowing down debt accumulation and lowering sovereign spreads. Our framework replicates the positive comovements of spreads with nominal domestic rates and inflation, a salient feature of emerging mark...
|September 2017||Default Risk, Sectoral Reallocation, and Persistent Recessions|
with Cristina Arellano, Yan Bai: w23835
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 the...
Published: Cristina Arellano & Yan Bai & Gabriel Mihalache, 2018. "Default risk, sectoral reallocation, and persistent recessions," Journal of International Economics, . citation courtesy of
|June 2017||Default Risk, Sectoral Reallocation, and Persistent Recessions|
with Cristina Arellano, Yan Bai
in NBER International Seminar on Macroeconomics 2017, Jeffrey Frankel, Hélène Rey, and Charles Engel, organizers
|January 2015||The Maturity and Payment Schedule of Sovereign Debt|
with Yan Bai, Seon Tae Kim: w20896
This paper studies the maturity and stream of payments of sovereign debt. Using Bloomberg bond data for eleven emerging economies, we document that countries react to crises by issuing debt with shortened maturity but back-load payment schedules. To account for this pattern, we develop a sovereign default model with an endogenous choice of debt maturity and payment schedule. During recessions, the country prefers its payments to be more back-loaded—delaying relatively larger payments—to smooth consumption. However, such a back-loaded schedule is expensive given that later payments carry higher default risk. To reduce borrowing costs, the country optimally shortens maturity. When calibrated to the Brazilian data, the model can rationalize the observed patterns of maturity and payment schedu...