Essays on sovereign debt default, fiscal austerity and income inequality

Sovereign debt crises could lead to different policy decisions to reduce debt burdens, like debt defaults or fiscal adjustments. The first chapter of this dissertation studies the factors underlying the observed persistence of sovereign debt defaults in Emerging Market Economies. The empirical literature has argued that a country's default history is the main determinant of the future default risk. However, there are two factors generating the effect from history on the probability of default: state dependence and unobserved heterogeneity. Is a country more likely to default because it has experienced a default in the past (state dependence) or does the country have some previous specific characteristics that make it more prone to default (unobserved heterogeneity)? Results indicate that state dependence effects are large and that the omission of unobserved heterogeneity has drastic consequences when assessing countries' default risk. When unobserved heterogeneity is accounted for, there are countries with high risk of default even if negligible levels of debt are assigned to them. Conversely, other countries show a low probability of default even with assigned levels of indebtedness higher than those observed in the sample.;The second chapter explores the question of whether fiscal adjustment programs have been regressive or progressive in advanced economies. Does fiscal austerity have an adverse effect on income inequality? If this is the case, then controlling only for observed variables in the estimation of the income inequality equation would be insufficient, leading to inaccurate inference regarding the true distributional effect of a fiscal adjustment. In other words, there could be some unobserved factors influencing both the probability of a fiscal adjustment and the income distribution process. These unobserved features could be persistent over time-like deep institutional characteristics or social preferences towards inequality that have been shaped by the history, culture or demography of a country - or time-varying, such as the government's ability to implement sound fiscal policies. The main finding is that fiscal austerity significantly increases income inequality, an impact that is particularly understated when time-varying endogeneity is not accounted for. This suggests that low-income households are disproportionately bearing the costs of fiscal austerity.