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Sovereign Default, Terms of Trade and Interest Rates in Emerging Markets

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  • Gabriel Cuadra
  • Horacio Sapriza

Abstract

Emerging economies tend to experience larger fluctuations in their terms of trade, countercyclical interest rates and more default episodes than developed countries. These structural features might suggest a relevant role for world prices in driving country spreads. This paper studies the role of terms of trade shocks in inducing output fluctuations and countercyclical spreads using a stochastic dynamic general equilibrium model of a small open economy. The model predicts that default incentives and default premia are higher in recessions, as observed in the data. In a quantitative exercise, the model matches various features of emerging economies and can account for the dynamics of default episodes in these markets.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B2B671C88-DD9D-F7B0-45FC-4C375AAD6B58%7D.pdf
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Bibliographic Info

Paper provided by Banco de México in its series Working Papers with number 2006-01.

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Date of creation: Feb 2006
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Handle: RePEc:bdm:wpaper:2006-01

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Web page: http://www.banxico.org.mx
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Related research

Keywords: Default; Terms of Trade; Sovereign Debt;

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References

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Citations

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Cited by:
  1. Leonardo Martinez & Juan Carlos Hatchondo, 2009. "A model of credit risk without commitment," 2009 Meeting Papers 978, Society for Economic Dynamics.
  2. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2007. "Quantitative models of sovereign default and the threat of financial exclusion," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 251-286.
  3. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2009. "On the cyclicality of the interest rate in emerging economy models: solution methods matter," Working Paper 09-13, Federal Reserve Bank of Richmond.
  4. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2007. "The economics of sovereign defaults," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 163-187.
  5. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2009. "Heterogeneous Borrowers In Quantitative Models Of Sovereign Default," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1129-1151, November.
  6. Juan Carlos Hatchondo & Cesar Sosa-Padilla & Leonardo Martinez, 2010. "Debt dilution, overborrowing, and sovereign default risk," 2010 Meeting Papers 481, Society for Economic Dynamics.
  7. Juan Carlos Hatchondo & Leonardo Martinez, 2009. "Long-duration bonds and sovereign defaults," Working Paper 08-02, Federal Reserve Bank of Richmond.
  8. Ethan Cohen-Cole & Burcu Duygan-Bump & Judit Montoriol-Garriga, 2009. "Forgive and forget: who gets credit after bankruptcy and why?," Risk and Policy Analysis Unit Working Paper QAU09-2, Federal Reserve Bank of Boston.
  9. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2006. "Computing business cycles in emerging economy models," Working Paper 06-11, Federal Reserve Bank of Richmond.
  10. Juan M. Sanchez, 2009. "The role of information in the rise in consumer bankruptcies," Working Paper 09-04, Federal Reserve Bank of Richmond.
  11. Karlygash Kuralbayeva & David Vines, 2008. "Shocks to Terms of Trade and Risk-premium in an Intertemporal Model: The Dutch Disease and a Dutch Party," Open Economies Review, Springer, vol. 19(3), pages 277-303, July.
  12. Leonardo Martinez & Juan Carlos Hatchondo & Cesar Sosa Padilla, 2011. "Debt Dilution and Sovereign Default Risk," IMF Working Papers 11/70, International Monetary Fund.
  13. Kartik B. Athreya & Hubert P. Janicki, 2006. "Credit exclusion in quantitative models of bankruptcy: does it matter?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 17-49.

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