Uncertainty Shocks and Non-Fundamental Debt Crises: An Ambiguity Appoach

[pdf download], [latest version]

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.