Sovereign Default Risk and Firm Heterogeneity / Cristina Arellano, Yan Bai, Luigi Bocola.

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Arellano, Cristina

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w23314.Publication details: Cambridge, Mass. National Bureau of Economic Research 2017.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper measures the output costs of sovereign risk by combining a sovereign debt model with firm- and bank-level data. In our framework, an increase in sovereign risk lowers the price of government debt and has an adverse impact on banks' balance sheets, disrupting banks' ability to finance firms. Importantly, firms are not equally affected by these developments: those that have greater financing needs and borrow from banks that are more exposed to government debt cut their production the most in a debt crisis. We use Italian data to measure these firm-level elasticities and use them as empirical targets for estimating the structural model. In a counterfactual analysis, we find that heightened sovereign risk was responsible for one-third of the observed output decline during the Italian debt crisis.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w23314 (Browse shelf(Opens below))	Not For Loan

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April 2017.

This paper measures the output costs of sovereign risk by combining a sovereign debt model with firm- and bank-level data. In our framework, an increase in sovereign risk lowers the price of government debt and has an adverse impact on banks' balance sheets, disrupting banks' ability to finance firms. Importantly, firms are not equally affected by these developments: those that have greater financing needs and borrow from banks that are more exposed to government debt cut their production the most in a debt crisis. We use Italian data to measure these firm-level elasticities and use them as empirical targets for estimating the structural model. In a counterfactual analysis, we find that heightened sovereign risk was responsible for one-third of the observed output decline during the Italian debt crisis.