Sovereign default and asymmetric market information

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It is not a novelty that emerging market economies are prone to poor institutions, additional layers of uncertainty and lack of transparency. There is quite a signi cant body of literature that shows the negative e ects due to lack of transparency. Among others, Gelos and Wei (2005) provide evidence that less transparent countries receive less investment and that during crisis they are more likely to experience high capital out ows.1 Marques, Gelos, and Melgar (2013) document that more opaque countries su er more from nancial globalization. Several economic crises have been partially worsened by lack of transparency. For instance, in the recent Asian crisis, Thai government has been accused of allowing an extremely opaque nancial sector to ourish. It is considered to be one of the key elements that triggered the nancial turmoil in 1997. The 2008-2009 debt crisis has shown that, eventually, no country is shielded from high interest rate spreads, unsustainable debt and lack of transparency. Even developed countries like Spain and Greece have been undermined by revealed hidden debts, economic uncertainty and respectively una ordable borrowing costs. 2 The lack of transparency practiced by a range of countries is puzzling. In present work, I study the implications of information asymmetry, that appears between government and lenders, on economic outcomes and analyze the conditions when governments prefer to be less transparent about their states of economy. In particular, the thesis focuses on the joint dynamics of asymmetric information between market participants and sovereign debt and default. In part I, Sovereign Debt and asymmetric market information", I show that in an environment when government is less uncertain about the future state of the economy than lenders are, the former ends up borrowing higher amount of debt and defaults more often. I start with bringing some evidence that shows a positive correlation between the debt to GDP level and future economic uncertainty (proxied by root mean square of GDP growth forecast errors) for di erent countries. Then, I extend the recent quantitative models of sovereign default by allowing asymmetry in information between the government and foreign lenders. The key ingredients are the information about future endowment and its accuracy which are received by market participants. The obtained results can be explained by the fact that in an environment when lenders observe more accurate information, the gains for the government when lenders observe good news are less than costs that are coming from lenders observing bad news. Therefore, on average, government ends up borrowing more when lenders are less informed about future endowment and o er a relatively better price. Chapter 1 focuses on the mechanism of the model and explains how the information precision a ects the level of demanded debt. In chapter 2, I simulate a small open economy and compare the results to the existing literature of endogenous sovereign default. In part II, Optimal Transparency", I study the economic conditions when government prefers to be less transparent about its state of economy. For this purpose, I develop a dynamic model of endogenous sovereign default with private information where both government and lenders act strategically and can update their beliefs upon observing government's actions. I nd that a government prefers to be opaque when it is overindebted, expects a more severe crisis, but with a lower probability. The rst two results are intuitive. A government that has high current debt or expects that recession is going to be more pronounced depends more on the external resources to nance its consumption. Therefore, a government that is experiencing a boom prefers to bear the cost of lower asset price so that it can enjoy a higher consumption if, eventually, a crisis comes. Additionally, I show that government prefers to be less transparent when it is more likely to have better times; and commits to disclose fully its state when it expects more likely to have bad times. If the probability of an upcoming crisis is very high, uninformed lenders increase the costs of borrowing. As a result, the optimal amount of debt under null transparency is close to the level that government in a crisis can borrow even if it reveals its state. Hence, government prefers to be fully transparent and enjoy higher consumption if it ends up in a good state during high probability of a crisis. If a recession is less likely, the price o ered by lenders increases, the amount of debt that a non-transparent government can borrow is higher and as a result, bene ts from being opaque also rise. Chapter 4 suggest some potential areas for future research.
Deuda publica, Información económica, Incertidumbre
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