Dr. Feng’s dissertation involves the study of sovereign debt flows with an emphasis on the determinants and characteristics of sovereign default in emerging markets. The topic of sovereign debt flow is explored through three distinct chapters.

Chapter One, entitled “World commodity prices, money, and foreign exchange in emerging markets: New evidence,” investigates countries’ monetary responses when they are encountering foreign revenue reduction caused by fluctuations in world commodity prices, before making the decision to default. Results show that declines in world commodity prices significantly, positively affect the ratio of broad money to GDP and that countries tend to have more flexible exchange rate regimes when world commodity prices are depressed for an extended period. The investigation of the response of the broad money supply is consistent with the open economy trilemma and the estimates of the exchange rate regime flexibility fills the gap of the literature on the determinants of the choice of exchange rate regimes. By capturing the type of global shock as well as the time-varying country characteristics, the effect of the price index (excluding the country fixed effect) well explains the time-series variation and country-specific variation of the exchange rate regimes.

Chapter Two, “World commodity prices and partial default in emerging markets: An empirical analysis”, explores the effects of the fluctuation in world commodity prices on sovereign default. The results show that the decrease in the price index increases the default rate. The response of the default rate varies across countries and it generally increases with a country’s dependence on the commodity exports and external indebtedness. This chapter provides the first economically-significant, quantitative estimates of the effect of world commodity prices on the default rate. This analysis employs a price index, as well as a large focus on the realized default risk, thus allowing for better controls of global shocks within the estimation, as well as creating a novel contribution to the literature.

In Chapter Three, “Sovereign debt: A quantitative comparative investigation of the partial default mechanism”, Dr. Feng builds and quantitatively solves the partial default models of a small open economy, in both endowment and production environments, to investigate the responses of the borrowing, default, and pricing of sovereign debt to economic shocks and to examine how the partial default mechanism improves the predictions of the sovereign default models. The simulation results of the models can well predict the country spreads, default-related statistics, and other business cycle indicators. The partial default models in Chapter Three have three features: firstly, the partial default is endogenously-determined, which allows one to compute the default rate; secondly, there is a preemptive recovery payment of the default, which enables the price function of the short-term debt to have the feature that the price of the long-term debt has; and thirdly, there is no exclusion from the international capital market after default, so the impulse responses of various macroeconomic variables can be examined.

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