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Specification of a Stochastic Simulation Model for Assessing Debt Sustainability in Emerging Market Economies

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Author Info

  • Philippe D Karam
  • Doug Hostland

Abstract

This paper documents the specification of a model that was constructed to assess debt sustainability in emerging market economies. Key features of the model include external and fiscal sectors, which allow assessment of external and public debt in a unified framework; public and external debt, which both have an explicit maturity structure along with a distinction between denomination in domestic versus foreign currency to facilitate debt management analysis; monetary and fiscal policy, which are endogenous and specified using explicit forward-looking policy rules; an endogenous risk premium on public and external debt; and a mechanism for invoking a sudden stop in private capital flows. The paper provides an overview of the basic structure of the model, outlines the methodology used to calibrate the parameters, and illustrates the key properties of the model with reference to dynamic responses of selected variables to shocks of interest.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/268.

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Length: 33
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/268

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Related research

Keywords: Debt sustainability; Emerging markets; Economic models; inflation; external debt; public debt; debt burden; monetary policy; external debt burden; foreign currency; inflation rate; current account; aggregate demand; domestic currency; real interest rates; budget balance; debt service; debt service payments; real interest rate; inflation process; debt management; debt burdens; steady-state inflation; terms of trade; external debt burdens; nominal interest rates; price level; debt default; private creditors; public and publicly guaranteed; low inflation; real output; rational expectations; relative price; sovereign debt; inflation target; central bank; debt intolerance; foreign exchange; current account balance; relative prices; domestic investors; public and publicly guaranteed debt; nominal interest rate; national debt; price elasticity; real exchange rates; inflation targeting regime; long-term debt; stock of debt; adaptive expectations; currency crises; domestic debt; inflation targeting; domestic debt markets;

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References

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  1. Lars E. O. Svensson, 2003. "What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," NBER Working Papers 9421, National Bureau of Economic Research, Inc.
  2. P. Marcelo Oviedo & Enrique Mendoza, 2004. "Public Debt, Fiscal Solvency, and Macroeconomic Uncertainty in Emerging Markets: The Tale of the Tormented Insurer," Econometric Society 2004 North American Summer Meetings, Econometric Society 647, Econometric Society.
  3. Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers, Trinity College Dublin, Department of Economics tep16, Trinity College Dublin, Department of Economics.
  4. Tamim Bayoumi & Douglas Laxton & Paolo Pesenti, 2004. "Benefits and Spillovers of Greater Competition in Europe: A Macroeconomic Assesment," NBER Working Papers 10416, National Bureau of Economic Research, Inc.
  5. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," NBER Working Papers 9908, National Bureau of Economic Research, Inc.
    • Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  6. Marcio Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data," NBER Working Papers 10336, National Bureau of Economic Research, Inc.
  7. Philippe D Karam & Doug Hostland, 2005. "Assessing Debt Sustainability in Emerging Market Economies Using Stochastic Simulation Methods," IMF Working Papers, International Monetary Fund 05/226, International Monetary Fund.
  8. Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "A Practical Model-Based Approach to Monetary Policy Analysis: Overview," IMF Working Papers, International Monetary Fund 06/80, International Monetary Fund.
  9. Dirk Muir & Douglas Laxton & Dennis P. J. Botman & Andrei Romanov, 2006. "A New-Open-Economy Macro Model for Fiscal Policy Evaluation," IMF Working Papers, International Monetary Fund 06/45, International Monetary Fund.
  10. Theodore M. Barnhill & George Kopits, 2003. "Assessing Fiscal Sustainability Under Uncertainity," IMF Working Papers, International Monetary Fund 03/79, International Monetary Fund.
  11. repec:rus:hseeco:123922 is not listed on IDEAS
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Citations

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Cited by:
  1. Albulescu, Claudiu Tiberiu, 2009. "Forecasting credit growth rate in Romania: from credit boom to credit crunch?," MPRA Paper 16740, University Library of Munich, Germany, revised 10 Aug 2009.
  2. Philippe D Karam & Doug Hostland, 2005. "Assessing Debt Sustainability in Emerging Market Economies Using Stochastic Simulation Methods," IMF Working Papers, International Monetary Fund 05/226, International Monetary Fund.
  3. Claudiu Tiberiu Albulescu, 2009. "Forecasting Romanian Financial System Stability using a Stochastic Simulation Model," Working Papers, International Network for Economic Research - INFER 2009.4, International Network for Economic Research - INFER.
  4. Albulescu, Claudiu Tiberiu, 2010. "Forecasting The Romanian Financial System Stability Using A Stochastic Simulation Model," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 81-98, March.

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