Sovereign Risk and Macroeconomic Fluctuations

Franz Hamann

No 3520, Borradores de Economia from Banco de la Republica

Abstract: This paper investigates the impact of sovereign risk on the stochastic rational expectations equilibrium of a pure exchange small open economy. International borrowing and lending arise from the interaction between a risk averse sovereign representative agent in a small open economy trying to self insure against idiosyncratic shocks and risk neutral international lenders. The credit market is imperfect because the sovereign cannot commit to repay its outstanding debt and chooses to default when it is optimal to do so. The possibility of default induces an endogenous sovereign risk premium on foreign debt and endogenous rationing by foreign creditors. The model is parameterized and solved numerically. The experiments conducted here generalize the results of Eaton and Gersovitz (1981) into environments with varying degrees of persistence and volatility in the underlying stochastic income process.

Pages: 31
Date: 2002-11-30
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www.banrep.gov.co/docum/ftp/borra225.pdf

Related works:
Working Paper: Sovereign Risk and Macroeconomic Fluctuations (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000094:003520

Access Statistics for this paper

More papers in Borradores de Economia from Banco de la Republica
Bibliographic data for series maintained by Clorith Angelica Bahos Olivera ().