Stangebye, Zachary R.

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  • Publication
    Essays in Macroeconomic and International Finance
    (2015-01-01) Stangebye, Zachary R.
    In the first two chapters of this dissertation, I explore the potential for sovereign debt mar- kets to experience a new type of dynamic lender coordination problem in sovereign debt markets that I call a dynamic panic. During a dynamic panic, expectations of future negative investor sentiments reduce the willingness of the sovereign to repay in the future and thus translate to negative investor sentiments today. I find conditions under which such sentiment dynamics can be active and document their presence in standard models. When the debt is of longer maturity I show that such panics resemble the recent Eurozone crisis, and so I explore policy implications in this environment. I find that interest rate ceilings are an ineffective policy tool but that liquidity provision by the ECB could be welfare-improving. Motivated by this result, in the second chapter I perform a structural estimation exercise to determine investors' ex ante forecast of such panics and the concomitant welfare consequences of liquidity provision. Using Bayesian methods and Spanish CDS spreads, I find that investors' forecast of such a crisis ex-ante was once every 7.37 years, which is in close accordance with the realized frequency of 7.5 years. I also find that liquidity provision by the ECB was likely welfare-improving. In the last chapter, my co-author and I document a downward trend in the leverage ratios of innovative firms. We argue that this trend could be the result of either a reduction in the cost of external equity finance or from a shifting the in the risk-frontier associated with innovation. To disentangle these alternative stories, we develop an equilibrium model of optimal finance choice. The estimated model suggests that a reduction in the cost of external equity finance is the more dominant driver of the observed trend: From the first time period to the next, the per-unit cost of equity falls by 31.6% while the risk frontier increases by only 4.7%.