Abstract

My dissertation consists of two essays studying sovereign default determinants in low-income countries. In chapter one, “Institutional Investment and Multilateral Debt Relief”, I study the effectiveness of well-designed debt relief programs into improving institutional quality. I focus my analysis in the Heavily Indebted Poor Countries (HIPC) Initiative, created in 1996 by the IMF and the World Bank, with the intention to assure sustainable debt levels in exchange of a multilateral debt relief. To obtain the relief, HIPC had to show a track record of institutional investments to improve institutional quality. I propose two proxies for institutional quality perceived by private investors: the amount of funds lent and the sovereign default on those loans. Using data from 30 HIPC in the Sub-Saharan African region, I find that receiving the relief is positively correlated with lending from private investors, and negatively correlated with sovereign default in private sector funds. Since default expectations are key determinants of lending decisions and countries could self-select into the HIPC Initiative, I build a structural sequential dynamic discrete choice model with multiple sequential choices that includes observed and unobserved heterogeneity. Agents raise funds from multilateral and private sources and decide on institutional investment, default or repayment, the type of default, and the optimal debt allocations. The model captures a reduction in sovereign default on private bonds as an explanation of the equilibrium increase in the bonds' level. In chapter two, “Partial Default and Exogenous Exchange Rate Shocks”, I study the effect of nominal exchange rate shocks in currency unions on the sovereign default intensive margin. The essay builds on a partial default structural model with endogenous intensive margin decisions. I consider a fixed exchange rate regime environment where all nominal depreciations happen exogenously, and countries can decide how much to optimally default on their sovereign debt (partial default). I calibrate the model to the African Financial Community (CFA) franc zones, where the domestic currencies have been pegged to a foreign currency since 1945 (first the French Franc and then the Euro) with only one domestic nominal devaluation. The model demonstrates that nominal depreciations increase the debt burden on the economy, resulting in a higher percentage of partial defaults, which aligns with empirical evidence. In addition, a robust analysis shows that the existence of a sovereign default intensive margin reduces negative welfare effects of nominal depreciations by about 25%.

Committee Chair

Gaetano Antinolfi

Committee Members

Mark Wright; Ana Babus; Costas Azariadis; Paulina Restrepo-Echavarría

Degree

Doctor of Philosophy (PhD)

Author's Department

Economics

Author's School

Graduate School of Arts and Sciences

Document Type

Dissertation

Date of Award

4-18-2025

Language

English (en)

Author's ORCID

https://orcid.org/0009-0002-2439-6276

Download

Included in

Economics Commons

Share

COinS