Sovereign default risk , financial stress , macroeconomic dynamics , euro crisis
Abstract:
The recent financial and sovereign debt crises around the world have sparked a growing literature
on models and empirical estimates of defaultable debt. Frequently households and firms
come under default threat, local governments can default, and recently sovereign default threats
were eminent for Greece and Spain 2012-13. Moreover, Argentina experienced an actual default
in 2001. What causes sovereign default risk, and what are the escape routes from default risk?
Previous studies such as Arellano (2008), Roch and Uhlig (2013) and Arellano et al. (2014) have
provided theoretical models to explore the main dynamics of sovereign defaults. These models
can be characterized as threshold models in which there is a convergence toward a good no-default
equilibrium below the threshold and a default equilibrium above the threshold. However, in these
models aggregate output is exogenous, so that important macroeconomic feedback effects are not
taken into account. In this paper, we 1) propose alternative model variants suitable for certain
types of countries in the EU where aggregate output is endogenously determined and where financial
stress plays a key role, 2) show how these model variants can be solved through the Nonlinear
Model Predictive Control numerical technique, and 3) present some empirical evidence on the
nonlinear dynamics of output, sovereign debt and financial stress in some euro area and other
industrialized countries.
Das Dokument wird vom Publikationsserver der Universitätsbibliothek Mannheim bereitgestellt.
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