Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/84304 
Authors: 
Year of Publication: 
2010
Series/Report no.: 
Serie Documentos de Trabajo No. 435
Publisher: 
Universidad del Centro de Estudios Macroeconómicos de Argentina (UCEMA), Buenos Aires
Abstract: 
The paper holds that the country risk premium is the triggering factor of the business cycle in a small, financially open and highly volatile economy like that of Argentina. A rise of the premium determines a capital outflow, an aggregate demand contraction and a recession; a fall of the premium determines a capital inflow, an aggregate demand expansion and a boom. We build a model where country risk plays a central role in macroeconomic equilibrium. We evaluate the empirical relationship between country risk and GDP, consumption, investment, and the current account balance. We compare our country-risk model with those of various schools of macroeconomic thought. Main conclusions are: a) Country-risk perceptions of foreign and local investors determine the fraction of world income they like to spend in the small country and the country's GDP adjusts passively to that fraction. b) Country risk causes a sort of labor unemployment that resembles involuntary unemployment. c) Openness softens the impact of a rise in country risk. d) Argentine time series for the period 1985-97 show a strong negative correlation between country risk and those aggregate variables, with causality going from the former to the latter.
JEL: 
E32
F41
Document Type: 
Working Paper

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