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Resource Curse or Blessing? Sovereign Risk in Emerging Economies

Author

Listed:
  • Franz Hamann

    (Banco de la República)

  • Enrique Mendoza

    (University of Pennsylvania)

  • Paulina Restrepo-Echavarria

    (Federal Reserve Bank of St Louis)

Abstract

In this paper we document the stylized facts about the relationship between international oil price swings, sovereign risk and macroeconomic performance of oil-exporting economies. We show that even though being a bigger oil producer decreases sovereign risk–because it increases a country’s ability to repay–having more oil reserves increases sovereign risk by making autarky more attractive. We develop a small open economy model of sovereign risk with incomplete international financial markets, in which optimal oil extraction and sovereign default interact. We use the model to understand the mechanisms behind the empirical facts.

Suggested Citation

  • Franz Hamann & Enrique Mendoza & Paulina Restrepo-Echavarria, 2018. "Resource Curse or Blessing? Sovereign Risk in Emerging Economies," 2018 Meeting Papers 1235, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:1235
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    References listed on IDEAS

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    3. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    4. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    5. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    6. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
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