Juliana Salomao
Job Market Candidate

Stanford University
Department of Economics
579 Serra Mall
Stanford, CA 94305
(415) 690 3414




Curriculum Vitae

International Economics, Macroeconomics, Finance

Expected Graduation Date:
June, 2014


Thesis Committee:
Martin Schneider (Primary):

Monika Piazzesi:

Manuel Amador:

Pablo Kurlat:

Job Market Paper
Sovereign Debt Renegotiation and Credit Default Swaps (pdf)
A credit default swap (CDS) contract provides insurance against default. After a country defaults, the country and its lenders usually negotiate over the share of the defaulted debt to be repaid. This paper incorporates CDS contracts into a sovereign default model and demonstrates that the existence of a CDS market results in lower default probability, higher debt levels, and lower financing costs for the country. Since the CDS payout is not automatically triggered by losses from renegotiations, the lender needs to be compensated for lower expected insurance payments. This leads to higher debt repayment in renegotiation, decreasing the benefits of defaulting, and hence allowing the country to borrow more at lower rates. Uncertainty over the insurance payout when the debt is renegotiated also explains the price discrepancy between CDS and bonds. Furthermore, this pricing dynamic during a debt crisis can be used to infer market perceptions of the probability of the CDS paying out after a renegotiation. To quantitatively illustrate the above effects, the model is calibrated to Greek data and the results show that increasing CDS levels from 0 to 5% of debt lowers the unconditional default probability from 2.6% to 2.0% per year with no impact on debt level. Further increasing the CDS to 40% of debt increases the equilibrium debt level by 15%.

Other Research Papers
Trend and Cycle in Bond Premia (pdf) (with Monika Piazzesi and Martin Schneider)
Common statistical measures of bond risk premia are volatile and countercyclical. This paper uses survey data on interest rate forecasts to construct subjective bond risk premia. Subjective premia are less volatile and not very cyclical; instead they are high only around the early 1980s. The reason for the discrepancy is that survey forecasts of interest rates are made as if both the level and the slope of the yield curve are more persistent than under common statistical models.

Why do emerging economies accumulate debt and reserves?(pdf)
Reserve accumulation has the benefit of decreasing external vulnerability but it comes with a high cost. Emerging economies have been accumulating reserves without reducing their levels of debt. This behavior is puzzling because these economies could also decrease their vulnerability by decreasing their debt. In this paper I construct a stochastic dynamic equilibrium model of a small open economy with non-contingent debt and reserve assets. Reserves have the benefit of smoothing consumption when the country is in autarky, after defaulting. Once we assume the asymmetric default costs of Arellano (2008), the results show that the optimal policy is to accumulate positive levels of debt and reserves in equilibrium. These economies accumulate reserves without decreasing debt because it decreases the cost of autarky after they default. For governments to accumulate reserves and debt simultaneously they need to be patient enough to save but still have positive probability of default , the asymmetric default costs generate that.

Firm Financing over the Business Cycle (pdf)
(with Juliane Begenau)
Firm financing is the link between financial markets and the real economy. In this paper, we investigate how firm financing depends on the state of the economy. Using Compustat data, we look at the external financing decisions of firms over the business cycle. We find that firm financing is cyclical, but that the cyclicality depends on size. Whereas large firms seem to substitute between debt and equity financing over the business cycle, small firms are unable to do so, increasing financing in good times and reducing it in bad. More importantly, small firms make extensive use of equity financing which is generally more expensive. In this paper, we propose a mechanism that explains these empirical facts in a heterogeneous firm optimization model. Our mechanism is based on two main features: (1) small firms are growing and therefore need more funds and (2) cost of debt financing is higher for more leveraged firms. These features imply that small firms’ funding needs cannot be satisfied by debt alone. Especially not in booms when growth opportunities and therefore funding needs are higher. For this reason they turn to equity. The model accounts for the cyclical patterns we see in the data.