Sovereign Risk and Economic Activity: The Role of Firm Entry and Exit

77 Pages Posted: 25 Jan 2023 Last revised: 19 Aug 2024

See all articles by Gaston Chaumont

Gaston Chaumont

University of Rochester

Givi Melkadze

Georgia State University - Department of Economics

ia Vardishvili

Auburn University - Department of Economics

Date Written: August 18, 2024

Abstract

We quantify the role of firm entry and exit in shaping the output costs of sovereign debt crises. Empirically, higher sovereign risk correlates with less firm entry and more exits. We find evidence of credit frictions explaining the sovereign risk-entry relationship and the sovereign risk-exit relationship for small firms. We develop a model with sovereign risk, financial frictions, and endogenous firm dynamics. Calibrated to the Portuguese debt crisis, the model predicts that sovereign risk largely explains the observed entry and exit dynamics. The extensive margin accounts for about 35-64% of the medium-run and most of the long-run persistent output fall.

Keywords: Sovereign Debt Crises, Financial Frictions, Firm Dynamics. JEL classifications: E32, E44, F34, G15

JEL Classification: E32, E44, F34, G15

Suggested Citation

Chaumont, Gaston and Melkadze, Givi and Vardishvili, ia, Sovereign Risk and Economic Activity: The Role of Firm Entry and Exit (August 18, 2024). Available at SSRN: https://ssrn.com/abstract=4335722 or http://dx.doi.org/10.2139/ssrn.4335722

Gaston Chaumont (Contact Author)

University of Rochester ( email )

229 Harkness Hall
University of Rochester
Rochester, NY 14611
United States
5852753968 (Phone)

HOME PAGE: http://https://sites.google.com/view/gastonchaumont/home

Givi Melkadze

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

Ia Vardishvili

Auburn University - Department of Economics ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States
4349876523 (Phone)
36830-5836 (Fax)

HOME PAGE: http://www.iavardishvili.com/research

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