Research

Publications

Sovereign borrowing, financial assistance, and debt repudiation (with Florian Kirsch) 

Economic Theory, Volume 64, 2017, Pages 777-804, doi link

Working Paper Version: Bonn Econ Discussion Paper 01/2013, January 2013, [Link]

Official lenders provide financial assistance to countries that face sovereign debt crises. The availability of financial assistance has counteracting effects on the default incentives of governments. On the one hand, financial assistance can help to avoid defaults by bridging times of fundamental crises or resolving coordination failures among private investors. On the other hand, the insurance effect of financial assistance lowers borrowing costs, which induces the sovereign to accumulate higher debt levels. To assess the overall effect of financial assistance on the probability of default, we construct a quantitative model of endogenous credit structure and sovereign default that allows for self-fulfilling expectations of default. Calibrating the model to Argentinean data, we find that the availability of financial assistance reduces the number of defaults that occur due to self-fulfilling runs by private investors. However, at the same time, it raises average debt levels causing an overall increase in the probability of default.

Sovereign default risk and state-dependent twin deficits (with Patrick Hürtgen)

Journal of International Money and Finance, Volume 48, 2014, Pages 357-382, doi link

Working Paper Version, March 2014 [pdf]

This paper was awarded the Heinz König Young Scholar Award 2013 by the ZEW

This paper analyzes the impact of the government debt-to-GDP ratio on the correlation of the fiscal balance and the current account. Above a government debt-to-GDP ratio of 90 percent the correlation of the two balances decreases by between 0.16 in a sample of 12 euro area countries and by 0.17 for Greece, Ireland, Portugal and Spain. This paper develops a small open economy model with defaultable government debt and riskless international capital markets to explain the empirical evidence of a state-dependent change in the correlation. In the model high public debt-to-GDP ratios raise sovereign risk premia as the default probability increases, leading to higher uncertainty about future taxes. In this case precautionary savings of households increase and partially compensate current account deficits that result from fiscal deficits. The increase in households' saving reduces the correlation of the two balances by the same magnitude as documented in the data. The model calibrated to Greece matches further business cycle moments and the empirical default frequency.

Work in Progress / Other Publications