Uncertainty Shocks and Non-Fundamental Debt Crises: An Ambiguity Appoach
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Brief Summary. I study the effects of uncertainty shocks in a quantitative general equilibrium framework when sovereign risk is endogenous and international investors are ambiguity averse. Uncertainty shocks induce ambiguity premia via a 'pricing channel' that affect fiscal policy, eventually causing non-fundamental default events. The paper provides a rationale for excess returns that have been observed in sovereign bond markets in the course of the European sovereign debt crisis.
The paper was presented at Barcelona GSE Summer Forum 2016, EUI Florence, Workshop on Dynamic Macroeconomics, Vígo 2015, Spain, EEA 2015 Meeting, Mannheim, 2015 VfS Tagung, Münster.
[slides]