Essays on Sovereign Default

This thesis consists of three separate chapters. In the first chapter, I review the literature on sovereign debt crises. In the second chapter, I analyze the role nominal debt plays in sovereign debt crises, and in particular default and inflation policies. Using bond-level data on government borrowing, I document that nominal obligations are a large fraction of government debt in emerging market countries. I then show that default and inflation rates vary systematically with debt denomination: high nominal debt shares are associated with low inflation and default rates in these countries. I build a monetary model of sovereign debt with lack of commitment, in which differences in debt denomination generate this pattern, and the government inflates more when debt is real. Issuing real instead of nominal debt has two effects in the model. On the one hand, real debt reduces the incentive to create costly inflation because the value of the debt is fixed in real terms. It thus helps mitigate the commitment problem. On the other hand, because the commitment problem is less severe, real debt facilitates more debt accumulation over time, causing the government to resort to the printing press after all to finance the debt burden. In a calibrated version of the model this second effect dominates: As in the data, inflation and default rates are higher on average when debt is real instead of nominal. Default risk helps generate large differences in inflation and default rates across debt regimes as the government optimally inflates in order to avoid default.;In the third chapter, I study incomplete debt relief in sovereign debt crises. I show that, in the data, sovereign defaults typically do not result in a full debt write-down. On the contrary, creditors recover on average more than half of their investment. I then build a model of sovereign default and incomplete debt relief to study the causes and consequences of incomplete debt relief. In the model, the degree of debt relief directly affects default incentives via bond prices. In particular, a high debt recovery rate - equivalently, little debt relief - reduces recovery risk to investors and tends to offset the effects of default risk. In equilibrium, incomplete debt relief lowers spreads and increases debt-to-output ratios and welfare. Default rates are non-monotonically related to debt relief and lowest for intermediate, but relatively low degrees of debt relief. I use the model to analyze the trade-off between long renegotiations and low debt relief and show that the latter is a more effective tool for achieving low equilibrium default rates and high welfare. Finally, the model predicts that countercyclical recovery rates are not welfare-improving.