òòò½Íø Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
The Aggregate-Demand Doom Loop: Precautionary Motives and the Welfare Costs of Sovereign Risk
òòò½Íø Journal: Macroeconomics
(pp. 160–204)
Abstract
I examine the role of households' precautionary savings motive in amplifying and propagating movements in sovereign spreads. I study this mechanism in a model where the government of a small open economy borrows from foreigners, but the debt is then partially held by heterogeneous domestic savers. In a calibration to Spain in the 2000s, I find that default risk accounts for about half of the output contraction. More generally, sovereign risk exacerbates volatility in consumption over time and across agents, creating large and unequal welfare costs even if default does not materialize.Citation
Roldán, Francisco. 2025. "The Aggregate-Demand Doom Loop: Precautionary Motives and the Welfare Costs of Sovereign Risk." òòò½Íø Journal: Macroeconomics 17 (3): 160–204. DOI: 10.1257/mac.20220248Additional Materials
JEL Classification
- E21 Macroeconomics: Consumption; Saving; Wealth
- F41 Open Economy Macroeconomics
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- H63 National Debt; Debt Management; Sovereign Debt