Dario Cardamone

Job Market Paper

The Macroeconomic Effects of Sovereign Risk: New Evidence from U.S. Debt Ceiling Episodes [pdf]

This paper provides new evidence on the macroeconomic consequences of sovereign risk. Exploiting high-frequency movements in Treasury prices around U.S. debt ceiling episodes, I construct a novel instrument to identify exogenous shocks to government repayment risk. These shocks generate immediate financial market disruptions and lead to persistent contractions in real economic activity, even in the absence of an actual default. The key transmission operates through the bank-lending channel: Valuation losses on government securities erode bank capital and induce a contraction in credit supply. Investment declines in response, particularly among financially constrained firms, and labor demand falls in capital-intensive sectors, compressing household income and weakening aggregate demand. I interpret these findings through the lens of a DSGE model with nominal rigidities and financial frictions, and use the framework to characterize optimal monetary policy in the presence of sovereign risk.