Essays on macroeconomics and sovereign default

Empirical work suggests that financial frictions, external shocks and political risk may play an important role in explaining the behavior of macroeconomic variables. These factors appear to be specially relevant in emerging economies.; The first chapter of this work deals with external determinants of sovereign default risk and country spreads in emerging markets using a dynamic stochastic model of a small open economy with equilibrium default and international credit market frictions. This chapter develops a neoclassical model to investigate the properties of default risk and how they respond to shocks to terms of trade and US real interest rates. Different empirical studies have analyzed the effects of US interest rates and other external shocks on country spreads in emerging market economies but the theoretical analyses in the literature consider the law of motion of the country spread as given. This paper provides a model of endogenous risk of default to study the role of terms of trade and US real interest rate shocks on output and country spreads and the interaction between these variables. The model predicts that default incentives and default premia are higher in recessions, as observed in empirical studies. In a quantitative exercise, the model matches certain features of emerging economies and can account for the dynamics of default episodes in these markets. Consistently with data, preliminary calibration results suggest that spreads are significantly responsive to terms of trade shocks, though not to US interest rates.; The second chapter uses a neoclassical framework to analyze the effect of nonnegative dividend constraints on firm risk and stock returns and helps to rationalize the anomalous evidence on the empirical relations among financial constraints, business cycles and expected stock returns. It is found that financial constraints reduce firm value and investment rates, and these adverse effects are more important for small firms and firms in relative distress. Strikingly, results also indicate that financial constraints are binding when aggregate economic conditions are relatively good. Further, the paper also finds that constrained firms are less risky and earn lower expected returns than unconstrained firms, and that financial constraints are more binding in good times. The model provides rich economic insights into the mechanisms driving these theoretical results.; The third chapter explores the effects of political uncertainty on income tax and redistribution policies in a stochastic general equilibrium model. It considers an economy with two types of agents, stockholders and non-stockholders, and two political parties with different social utility functions. The two parties alternate in power according to an exogenous stochastic process. The result is similar to those of spatial models of party competition, where political candidates under two party competition tend to move their political positions to the center in order to win the election. This however does not occur through the voting process, instead there is political convergence because political parties strategically manipulate each other's policy choices.