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The aggregate-demand doom loop: Precautionary motives and the welfare costs of sovereign risk

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  • Francisco Roldán

    (International Monetary Fund)

Abstract

I examine the role of households' precautionary savings motive in amplifying and propagating changes in sovereign spreads. I study this mechanism in a model where the government of a small open economy borrows from foreigners but the debt is then partially held by heterogeneous domestic savers. In a calibration to Spain in the 2000s, default risk accounts for about half of the output contraction. More generally, sovereign risk exacerbates volatility in consumption over time and across agents, creating large and unequal welfare costs even if default does not materialize.

Suggested Citation

  • Francisco Roldán, 2021. "The aggregate-demand doom loop: Precautionary motives and the welfare costs of sovereign risk," Working Papers 58, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:58
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    Cited by:

    1. Anzoategui, Diego, 2022. "Sovereign spreads and the effects of fiscal austerity," Journal of International Economics, Elsevier, vol. 139(C).

    More about this item

    Keywords

    Sovereign risk default aggregate demand precautionary motives heterogeneous agents;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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