Essays on International Trade and Sovereign Debt

This thesis studies the way intratemporal trade matters for intertemporal trade, focusing on three different interactions through sovereign debt. The thesis is divided in 3 chapters. In the first chapter, I show that existing evidence suggests that sovereign defaults disrupt international trade. As a consequence, countries that are more open have more to lose from a sovereign default and are less inclined to renege on their debt. In turn, lenders should trust more open countries and charge them lower interest rate. In most cases, a country should also borrow more debt the more open it is. The first chapter formalizes this idea in a simple sovereign debt model à la Eaton and Gersovitz (1981). It also provides evidence using gravitational instrumental variables from Frankel and Romer (1999) and Feyrer (2019) as a source for exogenous variation for trade openness. In the second chapter of the thesis, I develop a new model of crisis contagion through international trade. We focus on sovereign debt crises in a multi-country economy with endogenous default à la Eaton and Gersovitz (1981). The starting point of our analysis is the observation that sovereign defaults do not only reduce international borrowing, but also international trade flows: international trade is a commitment device to repay debt as a disruption in trade is one of the costs of default. As a consequence, when a country defaults, it reduces gains from trade in the rest of the world and it raises the incentives to default everywhere else. After providing some suggestive evidence for this kind of contagion through trade, we show how our model can rationalize default waves. Our model also predicts that more trade openness lowers the risks of a worldwide crisis, and it also has normative implications about tariffs and macroprudential policies because there is excess debt. A tax on debt and free-trade agreements with special tariff derogations for countries that want to default improve welfare from intertemporal transfers. In the third chapter, I wonder why sovereign spreads of a sovereign country appear to depend more on economic conditions in the rest of the world rather than those of the country itself. To shed light on this puzzle, I propose an Eaton-Gersovitz sovereign debt model with international trade and terms of trade effects. I assume that there is an exogenous foreign demand for the domestic good that can vary over time and that trade costs increase whenever the sovereign government defaults. After calibrating my model on recent data, I show that a large share of the volatility of spreads can be explained by movements in the foreign demand for domestic goods.

Name thesis:degree_name

Doctoral

Department dc:contributor.department

Massachusetts Institute of Technology. Department of Economics

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2021

Author dc:creator

• Serfaty, Charles

Advisors dc:contributor.advisor

• Costinot, Arnaud
• Werning, Iván

Statement dc:rights

• In Copyright - Educational Use Permitted
• Copyright retained by author(s)

Licence dc:rights.uri

• https://rightsstatements.org/page/InC-EDU/1.0/

Handle dc:identifier.uri

https://hdl.handle.net/1721.1/140118

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/140118