This paper studies the nature of financial frictions that firms face in an increasingly intangible economy. Using new microdata from South Korea, we document that intangible-intensive firms disproportionately borrow from non-bank lenders. This heterogeneity in the mode of financing is magnified and leads to differential outcomes in response to an exogenous tightening of bank credit supply. We find that intangible-intensive firms are mostly unaffected, while traditional firms struggle to finance their growth. To explain these findings, we build a model of heterogeneous firms and two sources of financing: shadow and regulated bank, with collateral constraints for the latter. Higher collateral requirement drives intangible-intensive firms away from bank borrowing and results in the rise of shadow credit. A counterfactual experiment using the model shows that suppressing the rise of shadow financing comes at significant cost.

We show that preemptive austerity can be the optimal policy in a model with self-fulfilling debt crises, even when faced with a recession. By preemptive austerity we mean the situation when the optimal policy is to increase taxes and reduce the level of debt in order to deter potential rollover crises. The key ingredient for this counter-intuitive result is the fact that in our model tax rates are announced at the beginning of the period, so that committing to a high tax in advance guarantees the government continuing access to cheap credit. This tax policy deters international lenders' panics, but is ex-post suboptimal and that is why the sovereign reduces the level of debt to a point where high taxes are no longer necessary to deter panics.

This paper explores the accumulation path of the external public debt of low-income countries (LICs) following debt relief programs. Using the relaxation of IMF debt limits for LICs that received debt relief in the early 2000s, I document that even though LICs initially lowered external debt during debt relief programs, many experienced a fast resurgence in their indebtedness and increased default risk once borrowing limits were lifted. Using a difference-in-differences model, I show that countries that benefited from the relaxation seem more likely to experience a significant increase in their debt-to-GDP ratio. I then evaluate these debt limits policies using a quantitative model of sovereign default that allows for self-fulfilling debt crises. The model includes two types of debt - subsidized loans from multilateral institutions and non-subsidized loans from the private market and an impatient government. After debt limits are lifted, my model predicts that the lower the government discount’s factor is compared to the international lenders, the more likely the country is to be in crisis and be in debt distress. I find that having an impatient government from the perspective of a more patient household leads to a decrease in welfare by 0.9%.

This paper proposes a model of sovereign default that features interest rate multiplicity driven by rollover risk. Our core mechanism shows that the possibility of a rollover crisis by itself can lead to high interest rates, which in turn reinforce the rollover risk. By exploiting a complementarity between the traditional notions of slow- and fast-moving crises, our model generates a rich simulated dynamics of debt that features frequent de- faults and a volatile bond spread, even in the absence of shocks to income. Combined with risky income, our mechanism amplifies the pervasiveness of debt crises relative to a model where interest rate multiplicity is driven by income shocks alone.