Department of Economics
University of Notre Dame
3060 Jenkins Nanovic Hall
Notre Dame, IN 46556
NBER Program Affiliations:
NBER Affiliation: Faculty Research Fellow
Institutional Affiliation: University of Notre Dame
NBER Working Papers and Publications
|August 2020||Interest Rate Uncertainty and Sovereign Default Risk|
with , : w27639
International data suggests that fluctuations in the level and volatility of the world interest rate (as measured by the US treasury bill rate) are positively correlated with both the level and volatility of sovereign spreads in emerging economies. We incorporate an estimated time-varying process for the world interest rate into a model of sovereign default calibrated to a panel of emerging economies. Time variation in the world interest rate interacts with default incentives in the model and leads to state contingent effects on borrowing and sovereign spreads which resemble those found in the data. The model delivers up to one-half of the positive comovement between the level and volatility of world interest rate and the level of sovereign spreads seen in emerging economies. Moreover, the...
|June 2020||Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk|
with : w27323
In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with ﬁxed exchange rates. We propose a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we show that the interaction between sovereign risk and aggregate demand ampliﬁcation generates a macroeconomic-stabilization hedging role for international reserves. Reserves increase debt sustainability to such an extent that ﬁnancing reserves with debt accumulation may not necessarily lead to increases in spreads. We also study simple and implementable rules for reserve accumulation. Our ﬁndings suggest that a simple linear rule linked to spreads can achieve signiﬁcant welfare gains,...