de Ferra, Sergio
(2016)
Essays in international macroeconomics.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis comprises three chapters. In the first chapter, I analyze three main facts from the recent experience of capital flows in the European monetary union. First, core and periphery countries ran widening current account surplus and deficit positions. Second, core countries intermediated gross capital flows from the rest of the world, which financed deficits in the periphery. Finally, a pervasive sovereign debt crisis took place. I argue that institutional features of the Economic and Monetary Union have contributed to these facts. First, I show in a theoretical model that subsidies on holdings of euro-denominated assets contribute to all three phenomena. Second, I build a dynamic model of an economic union. The model generates predictions for net and gross asset flows that quantitatively replicate the EMU experience. Finally, I propose a novel theoretical mechanism magnifying the severity of a debt crisis in an economic union. In the second chapter, I study the interaction between sovereign default risk, firm-level financial frictions, and fiscal policy. This research is motivated by the severe contraction observed in Italy during the euro area sovereign debt crisis. I show that a sovereign debt crisis causes a reduction of credit to firms, occurring through the channel of domestic fiscal policy. A fiscal tightening in the country in crisis causes a reduction of firms’ profits and an increase in their default risk. Secondly, I show that firms are heterogeneous in the degree to which they are affected by a crisis: Firms in the non-tradable sector are more vulnerable, as demand for their output falls in a crisis. In the third chapter, I study the determinants of time-varying volatility in interest rates on emerging market economies’ external debt. I show that a baseline model of endogenous sovereign default quantitatively replicates the pattern of time-varying volatility observed in the data. The model features a key non-linearity in the policy function for the interest rate on external debt. In the absence of shocks to the second moment of stochastic variables, the model generates a path of interest rates that is more volatile in bad times, when output is low and debt is high.
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