This paper asks how trade liberalization affects aggregate risk. I develop a multicountry model in which firms choose suppliers before shocks, trading off expected costs against diversification. Using Long-WIOD data for 24 countries and 23 industries, I invert bilateral trade wedges from expenditure shares, allowing for insurance premia. Moving border wedges from 1967 to 2024 lowers mean consumption variance by 36% and reduces risk in 20 of 24 countries. Pushing barriers below the observed range reverses the pattern: production shifts toward central suppliers, and aggregate risk rises. Market incompleteness matters through buyer-specific pricing kernels that shape an endogenous input-output network.

This paper studies how sovereign default risk shapes investment in climate adaptation. Using a new panel of adaptation spending, we show that after catastrophic disasters spreads rise where prior adaptation was low and that losses are smaller where adaptation budgets increased. Next, we build a sovereign default model in which governments invest in adaptation to reduce disaster damage. Sovereign risk depresses adaptation through two mechanisms: higher borrowing costs and debt overhang under long-term debt. These effects generate feedback between risk and disaster exposure. In our calibration, adaptation yields the largest welfare gains near the default boundary, where financing is tightest.

During the 2010-2012 European debt crisis, Italian sovereign spreads spiked far beyond what fundamentals could explain, while debt maturity shortened. Existing quantitative work attributes only a modest role to self-fulfilling risk. We develop a sovereign debt model with endogenous maturity and Calvo-style self-fulfilling crises in which long-term bonds carry within-period confidence risk and short-term debt insures against it. Maturity shortening is the optimal response to the increase in confidence risk, not evidence against it. A particle filter on Italian data attributes roughly 80 percent of the late-2011 spread spike to a rise in confidence risk, with direct implications for crisis interventions.

This paper shows the vulnerability of the government to face a self-fulfilling crisis characterized by low domestic demand for government bonds associated with a high probability of default. Investor expectations of low domestic demand increase foreign debt and default probability. High default risk decreases bond prices and prompts higher taxes or reduced government transfers. Consequently, domestic demand is low, confirming the initial expectation. I introduce a version of a sovereign debt model with domestic and foreign investors, analyze conditions for multiple equilibria, and establish that the government must announce a sequence of subsidies contingent on aggregate demand to restore efficiency.

In emerging economies, local-currency bonds dominate government debt and are predominantly held by domestic investors. We develop a model that explains both facts jointly. Domestic investors prefer local-currency bonds because they provide insurance against distortionary taxation. The government exploits this preference: issuing local-currency debt stimulates domestic demand, which lowers default risk. As a result, issuing local-currency debt remains optimal even when it provides no fiscal insurance. Finally, we present empirical evidence from 17 emerging economies consistent with the model predictions.

We study how political economy frictions reshape macroprudential policy and the dynamics of credit booms in an open-economy model of financial crises. When policymakers with heterogeneous regulatory biases alternate in power, a forward-looking, responsible regulator tightens preemptively — setting tighter capital controls even when near-term risks are low. Quantitatively, political frictions generate regulatory cycles in which extended tranquility is followed by deregulation and crises, consistent with event-study evidence around sudden stops. Finally, the framework clarifies why conventional empirical estimates can understate the effects of regulation on capital flows, and shows how political shocks can be used to remedy this endogeneity.

This paper analyzes how a government can use reserves to prevent a self-fulfilling crisis, as described in Lorenzoni and Werning (2019), where confidence-driven fluctuations affect bond prices. We propose a three-period model in which the government follows a fixed fiscal surplus rule and chooses the optimal reserve accumulation policy. Our analysis reveals a new mechanism for which debt-financed reserves provide insurance against self-fulfilling crises in the presence of long-term bonds. We also present empirical evidence that governments tend to accumulate reserves during periods of exceptionally high spreads and show how our theoretical framework could help explain this empirical pattern.

We examine self-fulfilling debt crises in a model of a monetary union with nominal rigidities. In the absence of policy commitment, the model features multiple equilibria — one with low interest rates and another with high rates, echoing Calvo (1998). We show that a credible commitment to an expansionary monetary policy can eliminate the high-rate equilibrium and avert self-fulfilling crises. Finally, the risk of confidence crises can lead to endogenous fragmentation within the union, as interest-rate spreads diverge between countries. This asymmetry creates a trade-off for monetary policy, which must balance the differing conditions faced by high- and low-spread member states.