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Financial friction sources in emerging economies: Structural estimation of sovereign default models

Takefumi Yamazaki
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Takefumi Yamazaki: Policy Research Institute, Ministry of Finance

Discussion papers from Policy Research Institute, Ministry of Finance Japan

Abstract: There are two literature strands that explain stylized facts in emerging economies: the stochastic productivity trend or financial frictions. However, financial frictions are driven by both trend and stationary productivity shocks, thus distinguishing their impact from the direct role of output fluctuations is essential. We estimate sovereign default models, full-nonlinear dynamic stochastic general equilibrium (DSGE) with micro-founded financial imperfections, applying a particle filter, and evaluate the source of financial frictions. The main finding is that stationary shocks rather than trend shocks account for financial frictions and the resulting countercyclicality, except for the post-1977 period in Mexico; however, the exception disappears for 1902?2005 as long-run data. The sources of financial frictions are determined by the persistence and volatility of shocks, asymmetric domestic cost of sovereign default, and mismatch between sovereign default and business cycles.

Keywords: Sovereign default; Business cycles; Financial imperfections; Particle filter; Sequential Monte Carlo; Full nonlinear DSGE (search for similar items in EconPapers)
JEL-codes: E32 E62 F41 F44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Date: 2018-02
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https://www.mof.go.jp/pri/research/discussion_paper/ron303.pdf First version, 2016 (application/pdf)

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