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On the role of financial aid in a default episode

Author

Listed:
  • Gabriel Cuadra

    (Banco de Mexico)

  • Manuel Ramos-Francia

    (Banco de Mexico)

  • Santiago Garcia-Verdu

    (Banco de Mexico)

Abstract

Our aim is to explore the role of financial aid in a default episode. To that end, we develop a dynamic stochastic quantitative model of sovereign default featuring fiscal policy, endogenous financial aid and risk-averse foreign lenders. After calibrating the model, we feed output shocks into the model to show that it captures some of the most salient features of the fiscal and debt situation in Argentina during the 1998–2002. This underscores the economic nature of the decision to default and the role that official aid could have taken in avoiding such an event. In effect, given the economic challenges endured by Argentina, a full-fledged default took place. In addition, we discuss a number of policy implications associated with financial aid programs aimed at preventing sovereign default episodes.

Suggested Citation

  • Gabriel Cuadra & Manuel Ramos-Francia & Santiago Garcia-Verdu, 2018. "On the role of financial aid in a default episode," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 27(1), pages 1-19, December.
    • Handle: RePEc:spr:laecrv:v:27:y:2018:i:1:d:10.1186_s40503-018-0060-2
    DOI: 10.1186/s40503-018-0060-2
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    More about this item

    Keywords

    Sovereign default; Fiscal policy; Financial aid;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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