New Department Working Paper: Alok Johri

We have another Department Working Paper from our Graduate Chair Alok Johri

Sovereign Default, Foreign Exchange-in-Advance Constraints, and Endogenous Default Costs

Alok Johri is a Professor with the Department of Economics, as well as our Graduate Chair. His research focuses on Macroeconomics and Monetary Economics. His new working paper is titled, “Sovereign Default, Foreign Exchange-in-Advance Constraints, and Endogenous Default Costs” which was influenced by the events around the Sri Lankan default crisis.  

Abstract

I build a sovereign default model in which importing economies must cover intermediate imports using accumulated foreign exchange (reserves). This occasionally-binding constraint: explains why imports and production fall during defaults; complements models with simultaneous holdings of debt and reserves; generates endogenous default costs that increase with output; and motivates defaults for reserve conservation. The model is less reliant on ad-hoc default costs prevalent in prior quantitative sovereign default models seeking to match the data. Simulations from the model reveal average output losses in default that are greater than 10%, and a 17% fall in imports and a large reserve-to-gdp ratio.

For the full set of working papers, visit RePEC/ideas.