Essays on Migration, Inequality and Sovereign Default

Download or read book Essays on Migration, Inequality and Sovereign Default written by Minjie Deng and published by . This book was released on 2020 with total page 142 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This dissertation consists of essays addressing the interactions between sovereign default risk and the household sector. Each chapter employs empirical, theoretical, and quantitative macroeconomic methods. The first chapter studies the impact of income inequality on sovereign spreads under elastic labor and endogenous taxation. I first document that high pretax income inequality is associated with high spreads both across countries and across U.S. states. I then develop a sovereign default model with endogenous progressive taxation and heterogeneous labor in productivity and migration cost. The government chooses the optimal combination of tax and debt, considering their interaction. Progressive taxes redistribute income but discourage labor supply and induce emigration, eroding the tax base and the government's ability to repay debt. Default risk increases sovereign spreads and borrowing costs. Thus, the government faces a trade-off between redistribution and spreads. In more unequal economies, the government opts for more redistribution and higher spreads. With the model parameterized to state-level data, I find that income inequality is an important determinant of spreads, generating 20 percent higher spreads compared with a model without income inequality. In a recession, more unequal economies suffer a larger increase in spreads. The second chapter studies the salient features of sovereign debt crises: persistent economic declines, spiking spreads, and outflows of capital and workers. We first document a net worker outflow accompanies a rise in sovereign debt spreads. We then develop a sovereign default model with migration choice and capital accumulation. The model features two-way feedback. Default risk lowers workers' welfare and induces emigration, which in turn intensifies default risk by lowering tax base and investment. Compared with a model without migration, our model generates a higher default risk, lower investment, and a more profound and prolonged recession. Despite the deeper recessions experienced with migration, agents are better off with the option to migrate. Our model rationalizes the salient features of the recent Spanish debt crisis. We find that migration accounts for almost all of the lack of recovery in real GDP between 2013 and 2016"--Pages vii-viii.