ESSAYS ON THE ROLE OF THE SOVEREIGN IN INTERNATIONAL FINANCE

Abstract

This dissertation investigates the role that the sovereign plays in the international economy, from two different aspects: the first chapter deals with the important role that institutional quality plays in the official accumulation of net foreign assets in emerging-market and developing economies, using a small-open economy model to account for the variation shown across economies in this regard; the second chapter shows the effects that the European Sovereign Debt Crisis that followed the Great Recession has had in the depressed investment rates in small and large firms in the euro area.

The first chapter shows that institutional quality has an important role in explaining differences in net sovereign foreign asset position and sovereign risk, while highlighting the importance of mercantilist strategies, understood as the strategies governments follow to exploit growth externalities in their tradable sectors. This frameworks allows the understanding of the vast accumulation of foreign assets that emerging-market and developing economies' governments have amassed during the current period of globalization, which has played a key role in generating the global imbalances.

The second chapter focuses on the advanced economies of the euro area, showing how increased sovereign risk depresses investment in the corporate sector through the bank balance-sheets. Using an enormous dataset linking firm, banks, and sovereigns, it can identify the effects that corporate overhang and rollover risk have in deterring firms from investing, and how sovereign risk worsen this problems but making difficult for firms to keep borrowing necessary for investment. This dataset includes many small firms, which are dependent on internal and banking sources of financing, as opposed to large firms, which can diversify and raise additional resources through issuance of bonds and stocks.