Essays In Optimal Debt Management

Author : Gabriel P. Mihalache
Publisher :
ISBN 13 :
Total Pages : 101 pages
Book Rating : 4.:/5 (958 download)

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Download or read book Essays on Debt Maturity and Default written by Gabriel P. Mihalache and published by . This book was released on 2016 with total page 101 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This dissertation consists of three essays concerning the way in which emerging market governments actively manage the maturity structure of their external, public debt, and the consequences of this behavior for their capital accounts, cost of borrowing, and default frequency. Each chapter employs quantitative-theoretic, macroeconomic methods to address outstanding puzzles in the literature or, as in the case of Chapter 3, new concerns about the data and assumptions customarily used when addressing these topics. The first chapter studies the debt restructuring process, which is eventually triggered following default. The empirical literature shows that increases in the maturity of debt provide the bulk of debt relief, during these proceedings. Countries emerge with a greater share of their debt in the form of long-term bonds, compared to what they owed at the time of default. A standard maturity choice model, once augmented with a renegotiation stage, is unable to replicate this critical feature of the data. We draw sharp parallels between the choice of maturity at the time of issuance and during the swap in order to explain this negative result. Introducing stochastic political turnover, due to which policy becomes more or less impatient over time, can solve the puzzle and explain observed outcomes. We interpret this finding as providing additional evidence on the role of political economy frictions in emerging markets. The second Chapter turns to the main outstanding puzzle in the debt maturity literature, which is the finding that, during bad times, emerging markets borrow using short-term debt. Using Bloomberg bond data for eleven emerging economies, we document that countries react to crises by issuing debt with shorter maturity but that, critically, they back-load payment schedules. To account for this pattern, we develop a sovereign default model with an endogenous choice of debt maturity and payment schedule. In the model, during recessions, the country prefers its payments to be more back-loaded--delaying relatively larger payments--to smooth consumption. However, such a back-loaded schedule is expensive given that later payments carry higher default risk. To reduce borrowing costs, the country optimally shortens maturity. When calibrated to the Brazilian data, the model can rationalize the observed patterns of maturity and payment schedule, as an optimal trade-off between consumption smoothing and endogenous borrowing cost. The last Chapter concerns the use of seasonally-adjusted time series in the calibration and evaluation of macroeconomic models. We argue that in the case of nonlinear models in general, and for sovereign default models in particular, such a practice is liable to yield misleading results and targets for quantitative work. We illustrate this point by constructing and calibrating a sovereign debt and default model which nests several salient cases from the literature. We find that allowing for long-term debt eliminates a counterfactual seasonal pattern in asset prices, exhibited by the benchmark, one-period debt model."--Pages iv-v.