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Sovereign Risk and Economic Activity: The Role of Firm Entry and Exit

Author

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  • Gaston Chaumont
  • Givi Melkadze
  • Ia Vardishvili

Abstract

We quantify the role of firm entry and exit in shaping the output costs of sovereign debt crises. Empirically, higher sovereign risk correlates with less firm entry and more exits. We find evidence of credit frictions explaining the sovereign risk–entry relationship and the sovereign risk–exit relationship for small firms. We develop a model with sovereign risk, financial frictions, and endogenous firm dynamics. Calibrated to the Portuguese debt crisis, the model predicts that sovereign risk largely explains the observed entry and exit dynamics. The extensive margin accounts for about 35%–64% of the medium-run and most of the long-run persistent output decline.

Suggested Citation

  • Gaston Chaumont & Givi Melkadze & Ia Vardishvili, 2026. "Sovereign Risk and Economic Activity: The Role of Firm Entry and Exit," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 4(3), pages 425-466.
    • Handle: RePEc:ucp:jpemac:doi:10.1086/741481
    DOI: 10.1086/741481
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