Sovereign Default Risk and Firm Heterogeneity


This paper studies the recessionary effects of sovereign default risk using firm-level data and a model of sovereign debt with firm heterogeneity. Our environment features a two-way feedback loop. Low output lowers tax revenues for the government and increases sovereign default risk. The associated increase in the sovereign interest rate spreads, in turn, raises the interest rates at which firms borrow, which further depresses their output. Importantly, these effects are not homogeneous across firms, as interest rates hikes have more severe consequences for firms that are in need of borrowing. Our approach consists in using these cross-sectional implications of the model, together with micro data, to measure the effects that sovereign risk has on real economic activity. In an application to Italy, we find that the progressive heightening of sovereign risk during the recent crisis was responsible for 50% of the observed decline in output.

University of Rochester
Saturday, March 16, 2013 - 13:00
Sala de Consejo, Beauchef 851, floor 4 - Departamento de Ingeniería Industrial, Universidad de Chile