The Welfare Cost of Sovereign Default and Liquidity Injections
Stellenbosch Working Paper Series No. WP12/2014Publication date: 2014
Author(s):
This paper develops a dynamic general equilibrium model with endogenous default on entrepreneur loans and funds borrowed from the central bank (liquidity injections) and investigates the welfare cost of sovereign default. The results show that sovereign default affects production through households' investment decisions and the bank's asset portfolio adjustment. The effect of sovereign default on entrepreneurs tends to be in favor of production. Sovereign default reduces the variability of the output gap and hence the welfare loss. Liquidity injections reduce the variability of the output gap and improve price stability during the period of sovereign debt crisis, resulting in an increase in households' welfare.
JEL Classification:E50, E58, E63, G18
Keywords:sovereign default, welfare cost, debt crisis, rollover risk, liquidity
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11 Jul 2025 Global trade risks resurface as SA faces new US tariffsThe US began issuing letters this week to announce new reciprocal tariffs, with South Africa among the first recipients. While President Donald Trump extended the implementation date to August 1, he warned that this would be the final delay. It was a quiet week on the data front, though South Africa’s stronger-than-expected factory output stood out...
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