Default Risk and Economic Activity: A Small Open Economy Model with Sovereign Debt and Default

Roldán-Peña Jessica
Authors registered in the RePEc Author Service: Jessica Roldán Peña ()

No 2012-16, Working Papers from Banco de México

Abstract: Empirical evidence shows that sovereign defaults are associated with signicant downturns in economic activity in defaulting countries. However, the existing literature on sovereign debt and default mainly analyzes endowment economies and, therefore, does not address the relationship between default risk and macroeconomic dynamics. This paper develops a general equilibrium small open economy model with financial frictions that allows to simultaneously examine the behavior of output, investment and borrowing dynamics and its interaction with sovereign 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 and sovereign spreads and the negative correlation between investment and net exports observed in the data. Furthermore, when analyzing its behavior around sovereign default, the model successfully captures the declines in output, consumption and investment that are actually associated with these episodes.

JEL-codes: E32 E44 F32 F34 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Default risk and economic activity: A small open economy model with sovereign debt and default (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bdm:wpaper:2012-16

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