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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Topic: "Two competing approaches in South African competition policy: merger control and anti-cartel enforcement over the past 30 years"
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25 Jul 2025 Budget hurdle cleared, but US tariff implementation remains a riskIt was another big week on the local political front, but with some constructive momentum. On the trade front, ahead of next week’s 1 August deadline, Trump announced another “massive” trade deal with Japan. The upcoming week is busy, with a slew of global and domestic data releases and several monetary policy decisions, including the SARB....
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