Sovereign Default Risk and Household Consumption

Sovereign Default Risk and Household Consumption | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Sovereign Default Risk and Household Consumption Teng Liu This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-5215213/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract In this paper, I uncover how sovereign debt default risks spill over into household consumption behavior through the fiscal channel. Existing studies have sparsely documented the consumption implications of sovereign default. During sovereign financial distress, a government typically conducts fiscal adjustment in areas such as pension and food assistance. Thus for households who benefit from public transfers, the adjustment of public expenditures matter for their consumption behavior. Using micro-level data of the National Survey of Household Income and Expenditure (ENIGH) of Mexico, I measure household consumption changes resulting from fiscal adjustment and from sovereign risks. The analyses consist of state-level and household-level estimates, and provide nuanced views of the default-consumption link by exploiting micro variables such as household income distribution, wealth, and socio-demographic characteristics. Both the state-level and household-level results suggest that in many cases, the link between default risk and household consumption is negative and significant, especially through the adjustment of pension expenditure. Abstract. In this paper, I uncover how sovereign debt default risks spill over into household consumption behavior through the fiscal channel. Existing studies have sparsely documented the consumption implications of sovereign default. During sovereign financial distress, a government typically conducts fiscal adjustment in areas such as pension and food assistance. Thus for households who benefit from public transfers, the adjustment of public expenditures matter for their consumption behavior. Using micro-level data of the National Survey of Household Income and Expenditure (ENIGH) of Mexico, I measure household consumption changes resulting from fiscal adjustment and from sovereign risks. The analyses consist of state-level and household-level estimates, and provide nuanced views of the default-consumption link by exploiting micro variables such as household income distribution, wealth, and socio-demographic characteristics. Both the state-level and household-level results suggest that in many cases, the link between default risk and household consumption is negative and significant, especially through the adjustment of pension expenditure. JEL Codes: F34, E21, H31 Sovereign Default Consumption Fiscal Policy Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-5215213","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":373244688,"identity":"3c0a23a9-1956-4177-9b33-18077aa38287","order_by":0,"name":"Teng Liu","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAAsElEQVRIiWNgGAWjYHACwwMJDDZQNhsR6nkYGAyAWtJI1cLAcJgELfbszRsOPGw7n9jff/gBw4eyw4S18PAcKziQ2HY7ccaNNAPGGeeI0SKRYwDWskGCh4GZt40YLfJvQFrOJW7gP8PA/JcoLRI8IC0HEjcw5DAwMxKl5UxawYGEc8nGIL8c7DmXTlgLe/vhjQ9/lNnJAkPs4YMfZdaEtaCAAySqHwWjYBSMglGACwAAulo9/yGR4G0AAAAASUVORK5CYII=","orcid":"","institution":"University of California, Santa Cruz","correspondingAuthor":true,"prefix":"","firstName":"Teng","middleName":"","lastName":"Liu","suffix":""}],"badges":[],"createdAt":"2024-10-07 04:08:14","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-5215213/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-5215213/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":74036505,"identity":"6fdb3b9e-b670-4197-b1b7-5cbbeba465a2","added_by":"auto","created_at":"2025-01-17 07:47:16","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":549164,"visible":true,"origin":"","legend":"","description":"","filename":"Archive.pdf","url":"https://assets-eu.researchsquare.com/files/rs-5215213/v1_covered_72473b3b-3be0-4b9c-a725-157a7226bd54.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Sovereign Default Risk and Household Consumption","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Sovereign Default, Consumption, Fiscal Policy","lastPublishedDoi":"10.21203/rs.3.rs-5215213/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-5215213/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eIn this paper, I uncover how sovereign debt default risks spill over into household consumption behavior through the fiscal channel. 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