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Financial friction sources in emerging economies: Structural estimation of sovereign default models

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  • Takefumi Yamazaki

    (Policy Research Institute, Ministry of Finance)

Abstract

There are two literature strands that explain stylized facts in emerging economies: the stochastic productivity trend or financial frictions. However, financial frictions are driven by both trend and stationary productivity shocks, thus distinguishing their impact from the direct role of output fluctuations is essential. We estimate sovereign default models, full-nonlinear dynamic stochastic general equilibrium (DSGE) with micro-founded financial imperfections, applying a particle filter, and evaluate the source of financial frictions. The main finding is that stationary shocks rather than trend shocks account for financial frictions and the resulting countercyclicality, except for the post-1977 period in Mexico; however, the exception disappears for 1902?2005 as long-run data. The sources of financial frictions are determined by the persistence and volatility of shocks, asymmetric domestic cost of sovereign default, and mismatch between sovereign default and business cycles.

Suggested Citation

  • Takefumi Yamazaki, 2018. "Financial friction sources in emerging economies: Structural estimation of sovereign default models," Discussion papers ron303, Policy Research Institute, Ministry of Finance Japan.
  • Handle: RePEc:mof:wpaper:ron303
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    File URL: https://www.mof.go.jp/pri/research/discussion_paper/ron303.pdf
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    Keywords

    Sovereign default; Business cycles; Financial imperfections; Particle filter; Sequential Monte Carlo; Full nonlinear DSGE;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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