Essays on Sovereign Debt, Governance and Inequality

Download or read book Essays on Sovereign Debt, Governance and Inequality written by Nachiket Jayeshkumar Thakkar and published by . This book was released on 2019 with total page 222 pages. Available in PDF, EPUB and Kindle. Book excerpt: In my first chapter I follow the methodology put forth by Bohn (1998), the market-based sustainability method to measure whether the sovereign debt is sustainable or not. I work with a panel of 125 countries for 26 years and along with incorporate different institutions ratings by ICRG's political risk ratings. In my analysis I find out that the debt on average is sustainable for countries up to certain extent and thus giving us an inverted U shape debt-exports curve. I use country exports to find out if the debt is sustainable or not. I also find that better institutions do give an edge to countries when it comes to borrowing as it lowers the risk expectations on the lenders part. The findings do vary based on the country's income level and based on its geographical location. My second chapter concerns with costs that country may have to bear when they default on their debt obligation and decide to renegotiate. Here, I use the renegotiation done between the Paris Club creditors and debtor countries. My analysis follows Rose (2005) which looked into debt renegotiation till 1998. I extend the research by looking into this from 1985 to 2015 and also including the role that institutions play in determination the cost that country plays, assuming that a country with better institutions will not be punished severely when it enters debt renegotiation. Here the punishment is in the form of decline in bilateral trade between both debtor & creditor and debtor & non-creditor. In our analysis we find that there is a decline in trade between debtor-creditor by 17% in the year of renegotiation and it continues for 5 years where as for debtor-non-creditor trade it keeps on declining for next 10 years, which shows that the debtor country does divert trade from non-creditors to creditors. And the effect stays the same when we include institutions in the equation. After the recent financial crisis in 2008-2009, there has been a lot of interest in finding out the determinants of such crises and the mechanism that it follows. One such research is done by Rajan (2010) and Kumhof & Ranciere (2011) who show linkage between the increasing income inequality, increase in availability of credit to domestic private sector and probability of banking crisis. In the third chapter we analyze whether the increased income inequality is a crucial factor that leads to a banking crisis. Using data from 46 emerging economies from 1985 to 2010 we find that the probability of banking crisis increases with an expansion in domestic credit. However, we do not find any significant effect of inequality on the expansion in domestic credit. Using data from emerging market economies, our analysis does not support the causal relationship between income inequality and banking crisis through credit expansion as hypothesized in the literature.