RT Dissertation/Thesis
T1 Sovereign default and asymmetric market information
A1 Croitorov, Olga
AB It is not a novelty that emerging market economies are prone to poor institutions, additionallayers of uncertainty and lack of transparency. There is quite a signi cant body of literaturethat 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 thatduring crisis they are more likely to experience high capital out ows.1 Marques, Gelos, andMelgar (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 extremelyopaque  nancial sector to  ourish. It is considered to be one of the key elementsthat 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 lackof transparency. Even developed countries like Spain and Greece have been undermined byrevealed hidden debts, economic uncertainty and respectively una ordable borrowing costs. 2The lack of transparency practiced by a range of countries is puzzling.In present work, I study the implications of information asymmetry, that appears betweengovernment and lenders, on economic outcomes and analyze the conditions whengovernments prefer to be less transparent about their states of economy. In particular, thethesis 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 environmentwhen government is less uncertain about the future state of the economy thanlenders are, the former ends up borrowing higher amount of debt and defaults more often. Istart with bringing some evidence that shows a positive correlation between the debt to GDPlevel and future economic uncertainty (proxied by root mean square of GDP growth forecasterrors) for di erent countries. Then, I extend the recent quantitative models of sovereigndefault by allowing asymmetry in information between the government and foreign lenders.The key ingredients are the information about future endowment and its accuracy which arereceived by market participants. The obtained results can be explained by the fact that in anenvironment when lenders observe more accurate information, the gains for the governmentwhen lenders observe good news are less than costs that are coming from lenders observingbad news. Therefore, on average, government ends up borrowing more when lenders are lessinformed about future endowment and o er a relatively better price. Chapter 1 focuses onthe mechanism of the model and explains how the information precision a ects the level ofdemanded debt. In chapter 2, I simulate a small open economy and compare the results tothe existing literature of endogenous sovereign default.In part II,  Optimal Transparency", I study the economic conditions when governmentprefers to be less transparent about its state of economy. For this purpose, I develop a dynamicmodel of endogenous sovereign default with private information where both governmentand lenders act strategically and can update their beliefs upon observing government'sactions. I  nd that a government prefers to be opaque when it is overindebted, expects amore severe crisis, but with a lower probability. The  rst two results are intuitive. A governmentthat has high current debt or expects that recession is going to be more pronounceddepends more on the external resources to  nance its consumption. Therefore, a governmentthat is experiencing a boom prefers to bear the cost of lower asset price so that it can enjoya higher consumption if, eventually, a crisis comes. Additionally, I show that government prefers to be less transparent when it is morelikely to have better times; and commits to disclose fully its state when it expects morelikely to have bad times. If the probability of an upcoming crisis is very high, uninformedlenders increase the costs of borrowing. As a result, the optimal amount of debt under nulltransparency is close to the level that government in a crisis can borrow even if it reveals itsstate. Hence, government prefers to be fully transparent and enjoy higher consumption if itends up in a good state during high probability of a crisis. If a recession is less likely, theprice o ered by lenders increases, the amount of debt that a non-transparent governmentcan borrow is higher and as a result, bene ts from being opaque also rise.Chapter 4 suggest some potential areas for future research.
YR 2014
FD 2014-10
LK https://hdl.handle.net/10016/19855
UL https://hdl.handle.net/10016/19855
LA eng
NO 
DS e-Archivo
RD 19 may. 2024