Neele Balke

About Me

I received my PhD in Economics from University College London in 2017. My main interests are sovereign default, optimal policy and computational economics.
I did a PostDoc at the University of Chicago in 2017/2018 and have continued my research in the Economics Department since.

Job Market Paper

In my job market paper I analyze the interaction between a government's default decision and labor market outcomes in a sovereign default model with persistent unemployment and financial frictions. I construct a model that endogenously creates a sovereign debt-default trade-off and offer a new explanation for domestic default costs – the employment cost of default.


Working papers

The Employment Cost of Sovereign Default (Job Market Paper) Latest version: May 2017

This paper analyzes the interaction between government default decisions and labor market outcomes in an environment with persistent unemployment and financial frictions. Sovereign risk impairs bank intermediation through balance sheet effects, worsening the conditions for firms to pre-finance wages and vacancies. This generates a new type of endogenous domestic default cost – the employment cost of default. The persistence of unemployment produces serial defaults and rationalizes high debt-to-GDP ratios. In the dynamic strategic game between the government and the private sector, anticipation effects allow the study of both debt crises and outright default episodes. Introducing employment subsidies and bank regulations affect the government’s ability to commit to debt repayment.

Time-consistent Fiscal Policy in a Debt Crisis (With M. Ravn) Latest version: November 2016

We analyze time-consistent fiscal policy in a sovereign debt model. We consider a production economy that incorporates feedback from policy to output through employment, features inequality though unemployment, and in which the government lacks a commitment technology. The government's optimal policies play off wedges due to the lack of lump-sum taxes and the distortions that taxes and transfers introduce on employment. Lack of commitment matters during a debt crisis – episodes where the price of debt reacts elastically to the issuance of new debt. In normal times, the government sets procyclical taxes, transfers and public goods provision but in crisis times it is optimal to implement austerity policies which minimize the distortions deriving from default premia. Could a third party provide a commitment technology, austerity is no longer optimal.

Work in progress

Sunspot-driven Bond Pricing with Dynamic Private Sector Behavior

This paper outlines a novel source for multiple equilibria in sovereign default models. In the model, multiplicity arises due to the presence of employment as an additional and privately determined state variable. If unemployment impacts on the default decision and its evolution depends on sovereign borrowing costs, an economy becomes prone to expectation-driven crises, rendering sovereign debt markets vulnerable to market panics. Pessimistic investors' expectations about default hike sovereign borrowing costs, which translates into higher unemployment and increases the likelihood of a sovereign default, validating the investors' adverse expectations. Three-state multiplicity emerges with neither changing the standard first-mover advantage of the government in the game with investors nor its limited commitment and thus is useful to study fundamental and expectation-driven default crises in a unified framework. The paper shows that policy makers may be able to break bad expectations and increase welfare with repayment guarantees from supranational agencies or fixed floors on debt prices.

The Spending Multiplier under Sovereign Default Risk

Fiscal policy is predominantly pro-cyclical in emerging but counter-cyclical in industrialized economies. Emerging economies also face higher interest rate spreads and a higher default probability than developed countries. I develop a stylized model in which the fiscal multiplier and the optimal fiscal policy are sensitive to the inclination to default. In an overlapping generations framework, young agents use domestic public debt to shift resources intertemporally to procure consumption at old age. A government, which can only levy one lump-sum tax on both age groups, may find it optimal to default which essentially reflects an additional tax on bond holders. If an increase in government spending triggers the default probability to rise it leads the young to anticipate higher (default) taxes and thus to stronger wealth effects. Spending is then associated with a different multiplier.



University College London

Ph.D. Economics June 2017

University College London

M.Sc. Economics, Distinction (Awards: Highest Grade, Best Dissertation) September 2011

University of Münster

B.Sc. Economics & Law, Distinction August 2010

Full CV (pdf)


ECONG105 Macroeconomics (PhD)

2013-2016 Teaching Assistant to Mariacristina DeNardi, Wei Cui, and Victor Ríos-Rull

ECON2004 Macroeconomic Theory and Policy (2nd)

2012-2013 Teaching Assistant to Liam Graham