Default risk and economic activity: A small open economy model with sovereign debt and default
Empirical evidence shows that sovereign defaults are associated with significant declines in economic activity in defaulting countries. However, the existing literature on sovereign debt and default mainly analyzes endowment economies and, therefore, does not speak for the interaction between default risk and macroeconomic dynamics. This paper develops a small open economy model with financial frictions, within which output and default risk are jointly determined, that allows to simultaneously examine the behavior of output, consumption and investment and their interaction with sovereign debt and default. When calibrated to match the business cycles properties of an average emerging market economy, the model is able to reproduce the countercyclicality of net exports, the countercyclicality of sovereign spreads and the negative correlation between investment and net exports observed in the data. Furthermore, when analyzing its dynamics around default episodes, the model captures the declines in output, consumption and investment that accompany sovereign defaults.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Tomz & Mark L. J. Wright, 2007.
"Do Countries Default In "Bad Times"?,"
CAMA Working Papers
2007-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Cristina Arellano & Ananth Ramanarayanan, 2008.
"Default and the maturity structure in sovereign bonds,"
410, Federal Reserve Bank of Minneapolis.
- Cristina Arellano & Ananth Ramanarayanan, 2012. "Default and the Maturity Structure in Sovereign Bonds," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 187 - 232.
- Cristina Arellano & Ananth Ramanarayanan, 2008. "Default and the maturity structure in sovereign bonds," Globalization and Monetary Policy Institute Working Paper 19, Federal Reserve Bank of Dallas.
- Ananth Ramanarayanan & Cristina Arellano, 2008. "Default and the Maturity Structure in Sovereign Bonds," 2008 Meeting Papers 479, Society for Economic Dynamics.
- repec:acb:camaaa:2009-15 is not listed on IDEAS
- Leonardo Martinez & Horacio Sapriza & Juan Carlos Hatchondo, 2010.
"Quantitative Properties of Sovereign Default Models; Solution Methods Matter,"
IMF Working Papers
10/100, International Monetary Fund.
- Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Quantitative properties of sovereign default models: solution methods matter," Working Paper 10-04, Federal Reserve Bank of Richmond.
- Kehoe, Timothy J & Levine, David K, 1993.
"Debt-Constrained Asset Markets,"
Review of Economic Studies,
Wiley Blackwell, vol. 60(4), pages 865-88, October.
- David Benjamin, 2008. "Recovery Before Redemption," 2008 Meeting Papers 531, Society for Economic Dynamics.
- Gaston Gelos & Guido Sandleris & Ratna Sahay, 2004.
"Sovereign Borrowing by Developing Countries; What Determines Market Access?,"
IMF Working Papers
04/221, International Monetary Fund.
- Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, vol. 83(2), pages 243-254, March.
- R. Gaston Gelos, Ratna Sahay and Guido Sandleris, 2008. "Sovereign Borrowing by Developing Countries: What Determines Market Access?," Business School Working Papers 2008-02, Universidad Torcuato Di Tella.
- Juan Carlos Hatchondo & Leonardo Martinez, 2009.
"Long-duration bonds and sovereign defaults,"
08-02, Federal Reserve Bank of Richmond.
- Gabriel Cuadra & Horacio Sapriza, 2006.
"Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets,"
2006-02, Banco de México.
- Cuadra, Gabriel & Sapriza, Horacio, 2008. "Sovereign default, interest rates and political uncertainty in emerging markets," Journal of International Economics, Elsevier, vol. 76(1), pages 78-88, September.
When requesting a correction, please mention this item's handle: RePEc:red:sed011:735. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.