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Sovereign Risk and Real Business Cycles in a Small Open Economy

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  • Franz Hamann

Abstract

This paper investigates the effect of sovereign risk on the stochastic rational expectations equilibrium of a real business cycle small open economy.The credit market is imperfect because the sovereign cannot commit to repay its outstanding debt and chooses to default when it is optimal to do so. The possibility of default induces an endogenous sovereign risk premium on foreign debt and an endogenous rationing limit set by foreign creditors. The model is parameterized and solved numerically to explore the determinants of the saving and investment decisions in an economy that can optimally choose to default on its foreign debt and the ability to account for the Sudden Stop of Capital inflows.

Suggested Citation

  • Franz Hamann, 2002. "Sovereign Risk and Real Business Cycles in a Small Open Economy," Borradores de Economia 226, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:226
    DOI: 10.32468/be.226
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    Cited by:

    1. Juan C. Méndez-Vizcaíno & Nicolás Moreno-Arias, 2021. "A Global Shock with Idiosyncratic Pains: State-Dependent Debt Limits for LATAM during the COVID-19 pandemic," Borradores de Economia 1175, Banco de la Republica de Colombia.
    2. Mauricio A. Hernández M & Munir A. Jalil B & Carlos Esteban Posada P, 2007. "El costo de los ciclos económicos en Colombia: una nueva estimación," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 25(53), pages 288-335, January.
    3. Cristina Arellano, 2005. "Default Risk, the Real Exchange Rate and Income Fluctuations in Emerging Economies," 2005 Meeting Papers 516, Society for Economic Dynamics.
    4. Carlos Esteban Posada Posada & Wilman G�mez, 2004. "Un choque del activo externo neto y el ciclo econ�mico Colombiano 1994-2001," Borradores de Economia 3674, Banco de la Republica.
    5. Wilman Gómez & Carlos Esteban Posada, 2004. "Un "Choque" del Activo Externo Neto y el Ciclo Económico Colombiano," Borradores de Economia 285, Banco de la Republica de Colombia.
    6. Nikolai Stähler, 2013. "Recent Developments In Quantitative Models Of Sovereign Default," Journal of Economic Surveys, Wiley Blackwell, vol. 27(4), pages 605-633, September.

    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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