@article{THESIS,
      recid = {1641},
      author = {Barrett, Philip Oliver},
      title = {Reputation and sovereign default},
      publisher = {University of Chicago},
      school = {Ph.D.},
      address = {2016-06},
      number = {THESIS},
      pages = {87},
      abstract = {This thesis has two central contributions.  One is  economic; it explains the behavior of sovereign interest  rates after a default.  The other contribution is  principally technical; it defines and provides an accurate  closed-form approximation to a common filtering problem.   The main steps in the argument are as follows:

  -  Standard economic theory predicts that after conditioning  on macroeconomic conditions, the cost of sovereign  borrowing is independent of a country's past default  history.

  - Empirical evidence contradicts this  prediction.  Countries which have recently defaulted pay  more to borrow than would be expected given their  observable macroeconomic conditions.  This extra cost of  borrowing is the conditional default premium.

  - I  propose a model of sovereign default where the government's  immediate cost of default is governed by a hidden type.

   - The ability of the model to generate high post-default  spreads depends crucially on the continuous nature of the  government' type.

  - The evolution of investors beliefs  of the government's type given the past default history is  a threshold filtering problem.  This is a common problem in  many models with persistent hidden types and binary  actions.

  - I propose an approximate solution to the  threshold filtering problem, which I term the threshold  filter.  This provides a closed-form solution to the  approximate evolution of the first two moments of the  distribution of the hidden state.  This is a substantially  more accurate solution to the problem than standard  filtering methods, such as the unscented Kalman filter or  exact Gaussian filter.

  - I use the threshold filter to  model investor's beliefs and so solve for equilibrium in  the sovereign default model.

  - A calibrated version of  the model generates quantitatively accurate high  post-default spreads.

  - I show that the threshold  filtering problem shows up in a wide variety of other  economic problems, including market entry and long-term  unemployment.  The threshold filter can be applied to these  scenarios as well.},
      url = {http://knowledge.uchicago.edu/record/1641},
      doi = {https://doi.org/10.6082/uchicago.1641},
}