Lorenzo PROSPERI will defend his thesis on Essays on "Sovereign Debt and the Macroeconomy" on Friday 5th July 2019 at 3:30 PM, room MF 323 (Manufacture des Tabacs)
Supervisor: Christian HELLWIG, Professor at TSE
- Christian HELLWIG,TSE
- Patrick FEVE, TSE
- Franck PORTIER, UCL
- Satyajit CHATTERJEE, Federal Reserve Bank of Philadelphia
In this thesis, we present three papers related to sovereign debt. In the first two chapters, we study the impor- tance of political frictions in explaining the large levels of sovereign debt to GDP observed in the data. In the third chapter, we evaluate the effects of banking regulation on sovereign exposures on macroeconomic activity.
In the first chapter, we explore the channel through which political frictions generates borrowing or saving incen- tives in a consumption model with full commitment to debt repayment. In particular, we argue that an impor- tant and not-yet analyzed determinant of the observed heterogeneity of government debt across countries is the interaction between political conflicts and transparency of institutions. When the incumbent has preferences over the distribution of resources across different groups, in a transparent economy political uncertainty leads to pre- cautionary savings. Nevertheless, assuming that in more non-transparent economies the probability of an incum- bent to be re-elected is more strongly a function of current economic conditions, then political uncertainty leads to borrowing incentives. We structurally estimate the two frictions (political conflict and lack of transparency) by using their macroeconomic implications, and we compare the estimated frictions with their proxies in the data.
In the second chapter, we show that the existence of borrowing incentive generated by political frictions can gen- erate large levels of debt to GDP, also when the agent is allowed to default on his debt. In particular, we intro- duce political uncertainty in the standard default model of Arellano2008: the incumbent has an exogenous prob- ability of not being reelected in the next period, but in the cases when she decides to default, there is a larger probability of losing power. The calibrated model matches business cycle moments and generates realistic levels of sovereign debt in Argentina. The estimated political cost of default from the model is shown as being consis- tent with the decline in confidence in the Argentinian government documented around its 2001 default event.
Finally, in the third chapter, we argue that favorable risk weighting on sovereign exposures induced by Basel regulation influences at the margin the composition of assets in banks’ balance sheets at the cost of penalizing lending activity. To quantify the effect of the distortion induced by this regulation, we build a standard RBC model calibrated to the Euro Area economy. Increasing risk weights on government bonds has positive long-run effects and stabilization properties with respect to the business cycle. In particular, this policy makes the steady state lending spread on firm loans decline, stimulating investment and output. Moreover, it stabilizes the lending spread leading to a lower volatility of investment and output.