Seminar in Macroeconomics - Sovereign Debt and the Investment Externality

Montag, 5. Dezember 2022
12 bis 13:15 Uhr


Veranstaltet von
Chair of International Macroeconomics

Vortragende Person/Vortragende Personen:
Emircan Yurdagul (Universidad Carlos III de Madrid)

Sovereign Debt and the Investment Externality

(joint with Hernán Seoane)

Abstract: In this paper we study the interaction between sovereign debt, default incentives and the corporate sector. We build a model of endogenous sovereign default and corporate investment. We find a persistent impact of default on corporate capital accumulation and we find that capital accumulation reduces the default risk. However, the competitive firm under-invests in equilibrium because it does not internalize the impact of capital accumulation on the spreads. Moreover, the competitive firm tends to invest more in good times as the default option of the government gives rise to a financial accelerator. If the government introduces an optimal investment tax it will induce firms to invest more during crisis times to reduce spreads, increase the tax base and for a hedging motive given that more capital improves the value of autarky. Hence, under the optimal tax scheme, the economy reduces consumption and trade balance volatility but does not necessarily have a lower default frequency.