Throughout history, advanced and emerging economies have been confronted by a multitude of sovereign debt and financial crises. The dramatic surge in public debt in many economies triggered by the recent financial crisis raises the question of the stability and sustainability, and it attracts notice to the role of default risk as source of macroeconomic volatility.pThe objective of this research project is to understand the theoretical mechanisms that explain the impact of sovereign and private default risks and their interactions on macroeconomic outcomes. To this end, we incorporate debt repudiation in stochastic dynamic general equilibrium models of closed and open economies.pThe project is organized along three topics. First, we analyze the international transmission of fiscal policy in the presence of default risks and study the implications for international risk sharing, capital flows and trade. Second, we explore the role of increasing public debt for private credit arrangements and investment under alternative contract enforcement mechanisms. Third, we study the spill-over effects between sovereign and private default events and analyze the consequences for macroeconomic activity.
