The Welfare Cost of Sovereign Default and Liquidity Injections

Stellenbosch Working Paper Series No. WP12/2014
 
Publication date: 2014
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

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

Download: PDF (221 KB)

Login

(for staff & registered students)



Need a password?
Forgot your password?

BER Weekly

16 September 2019
Despite weak incoming SA data for 2019Q3, the rand exchange rate and JSE benefitted from a global investor rotation in favour of riskier asset classes (see the markets section) last week. This was aided by the European Central Bank (ECB) announcing a widely expected stimulus package (for more, click here) and the US slightly delaying the imposition...

Read the full issue
 

BER Weekly

16 September 2019
Despite weak incoming SA data for 2019Q3, the rand exchange rate and JSE benefitted from a global investor rotation in favour of riskier asset classes (see the markets section) last week. This was aided by the European Central Bank (ECB) announcing a widely expected stimulus package (for more, click here) and the US slightly delaying the imposition...

Read the full issue