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Neele Balke

My research fields are Macroeconomics, International Finance and Computational Economics. My research mainly focuses on sovereign default and optimal policy.

In my job market paper I analyze the interaction between a government's default decision and labor market outcomes in a sovereign default model with persistent unemployment and financial frictions. I construct a model that endogenously creates a sovereign debt-default trade-off and offer a new explanation for domestic default costs – the employment costs of default.

  • Macroeconomics
  • International Finance
  • Computational Economics

The Employment Cost of Sovereign Default

Abstract

This paper analyzes the interaction between government default decisions and labor market outcomes in an environment with persistent unemployment and financial frictions. Sovereign risk impairs bank intermediation through balance sheet effects, worsening the conditions for firms to pre-finance wages and vacancies. This generates a new type of endogenous domestic default cost – the employment cost of default. The persistence of unemployment produces serial defaults and rationalizes high debt-to- GDP ratios. In the dynamic strategic game between the government and the private sector, anticipation effects allow the study of both debt crises and outright default episodes. Introducing employment subsidies and bank regulations affect the government’s ability to commit to debt repayment. 

  • Morten Ravn
  • Pat Kehoe
  • Vincent Sterk
  • Jan Eeckhout