On the role of financial aid in a default episode

Gabriel Cuadra, Manuel Ramos-Francia and Santiago Garcia-Verdu
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Manuel Ramos-Francia: Banco de Mexico
Authors registered in the RePEc Author Service: Manuel Ramos Francia

Latin American Economic Review, 2018, vol. 27, issue 1, 1-19

Abstract: Abstract Our aim is to explore the role of financial aid in a default episode. To that end, we develop a dynamic stochastic quantitative model of sovereign default featuring fiscal policy, endogenous financial aid and risk-averse foreign lenders. After calibrating the model, we feed output shocks into the model to show that it captures some of the most salient features of the fiscal and debt situation in Argentina during the 1998–2002. This underscores the economic nature of the decision to default and the role that official aid could have taken in avoiding such an event. In effect, given the economic challenges endured by Argentina, a full-fledged default took place. In addition, we discuss a number of policy implications associated with financial aid programs aimed at preventing sovereign default episodes.

Keywords: Sovereign default; Fiscal policy; Financial aid (search for similar items in EconPapers)
JEL-codes: E62 F34 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1186/s40503-018-0060-2

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