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

Format:

Book

Author/Creator:

Arellano, Cristina.

Contributor:

National Bureau of Economic Research.

Bai, Yan.

Bocola, Luigi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23314.

NBER working paper series no. w23314

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

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.

Notes:

Print version record

April 2017.