Speaker: Eugenia Andreasen
Co-author: David Kohn, Guido Sandleris
Affiliation: Universidad de Chile
Date and time: Wednesday, March 26, 202514:30 (Santiago, GMT-03:00)
Location: Sala Constitucion at the Central Bank of Chile, Morandé 115, second floor.
Registration: seminarios@bcentral.cl

Abstract: This paper investigates empirically and quantitatively the effects of higher sovereign risk on international trade. We first document, using a panel of exports and imports at the industry level by country, that an increase in sovereign credit default swap spreads leads to lower imports, particularly in industries more import-intensive and more dependent on external finance, while exports only decrease in more external-finance-dependent industries. We then set up a multi-industry small open economy model with a benevolent government, heterogeneous firms subject to working capital constraints, and international trade. The government has to finance an exogenous path of public spending with either taxes or defaultable debt. We calibrate the model to standard trade and sovereign default moments and find that an increase in sovereign spreads raises firms' borrowing costs, depreciates the real exchange rate, and decreases wages. These general equilibrium effects lead to lower imports and sales. Firms in industries that are more import-intensive and working-capital-intensive are more affected. Exports instead increase as firms reallocate sales in response to exchange rate depreciation and lower wages, but these offsetting effects are relatively smaller in more finance-intensive industries.