| This dissertation is a collection of three essays in international and financial economics. In these essays, I focus on government debt and firm financing decisions over the business cycle. In the first essay, I study the role of income inequality in government's borrowing and default decisions. To explore the relationship between default risk and income inequality, I extend the standard endogenous default model to allow for heterogeneous agents. The main finding of this paper is that inequality shocks can increase the default risk significantly. The model can also generate high consumption volatility of poor households relative to rich households, consistent with the data. I extend the model by introducing progressive income taxes and show that as the progressivity of the tax increases, the probability of default decreases. (Abstract shortened by UMI.). |
