THREE ESSAYS ON SOVEREIGN DEFAULT

Abstract

This thesis consists of three chapters on sovereign default. The first chapter, “Oil Price Uncertainty and Sovereign Spreads of Oil Importers", studies how changes in the volatility of global oil prices affects sovereign spreads. This study introduces time-varying volatility in global oil prices within a sovereign default model featuring long-duration bonds for a small open economy that relies on oil as a production input. The second chapter, “International Sovereign Spread Differences and the Poverty of Nations" (co-authored with Alok Johri), explores the role of poverty in explaining the differences in sovereign default across countries. By constructing a sovereign default model with poor and non-poor households and a government that wishes to run a social safety net using a tax-transfer scheme, we show that the higher default risk associated with a higher proportion of poor households implies much worse credit terms from international lender. The third chapter, “The Bribe Rate and Long Run Differences in Sovereign Borrowing Costs" (co-authored with Alok Johri and Johnny Cotoc), and published in the Journal of Economic Dynamics and Control, Volume 151(2023), shows that sovereign spreads and the level of bureaucratic diversion of government spending vary widely across emerging economies and are correlated with each other. By building a sovereign default model where the government is constrained to use corrupt bureaucrats to deliver public goods and service, we show that economies with low monitoring efficiency display higher diversion levels and higher default risk (and spreads) than those with higher efficiency. ii