Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83708
Authors: 
Roldán-Peña, Jessica
Year of Publication: 
2012
Series/Report no.: 
Working Papers, Banco de México 2012-16
Abstract: 
Empirical evidence shows that sovereign defaults are associated with significant downturns in economic activity in defaulting countries. However, the existing literature on sovereign debt and default mainly analyzes endowment economies and, therefore, does not address the relationship between default risk and macroeconomic dynamics. This paper develops a general equilibrium small open economy model with financial frictions that allows to simultaneously examine the behavior of output, investment and borrowing dynamics and its interaction with sovereign default. When calibrated to match the business cycles properties of an average emerging market economy, the model is able to reproduce the countercyclicality of net exports and sovereign spreads and the negative correlation between investment and net exports observed in the data. Furthermore, when analyzing its behavior around sovereign default, the model successfully captures the declines in output, consumption and investment that are actually associated with these episodes.
Subjects: 
sovereign debt
sovereign default
business cycles
small open economy
JEL: 
E32
E44
F32
F34
Document Type: 
Working Paper
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