Abtract: This paper studies the impact of political and financial frictions on the macroe-conomic activity around sovereign defaults. We compile a data-set that contains 16 default episodes. We examine the behavior of the economy around the time when de- fault happened, and document a set of stylized facts. To account for these empirical regularities, we introduce capital accumulation, endogenous government spending and taxation into an otherwise standard quantitative sovereign default model. We develop a novel numerical method to solve the equilibrium. The baseline economy is calibrated to match the macroeconomic dynamics of the average economy in our data-set. We use this model to explore how various political friction (government spending and / or taxation rigidity, etc.) and financial frictions (capital quality loss, etc.) affect the gov- ernment’s decision whether to default on their debt obligation or not, and the feedback effects of their fiscal policy on macroeconomic activities.
Friday, October 19, 2018
3:30pm – 5:00pm
Small reception to follow in Room 426. All are invited to attend.