The nonlinear nature of country risk and its implications for DSGE models

Michal Brzoza-Brzezina and Jacek Kotłowski

No 250, NBP Working Papers from Narodowy Bank Polski

Abstract: Country risk premia can substantially affect macroeconomic dynamics. We concentrate on one of their most important determinants - a country’s net foreign asset position and - in contrast to the existing research - investigate its nonlinear link to risk premia. The importance of this particular nonlinearity is twofold. First, it allows to identify the NFA level above which the elasticity becomes much (possibly dangerously) higher. Second, such a nonlinear relationship is a standard ingredient of DSGE models, but its proper calibration/ estimation is missing. Our estimation shows that indeed the link is highly nonlinear and helps to identify the NFA position where the nonlinearity kicks in at -70% to -80% of GDP. We also provide a proper calibration of the risk premium - NFA relationship used in DSGE models and demonstrate that its slope matters significantly for economic dynamics in such a model.

Keywords: Risk premium; PSTR model; open economy DSGE model (search for similar items in EconPapers)
JEL-codes: C23 E43 E44 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: THE NONLINEAR NATURE OF COUNTRY RISK AND ITS IMPLICATIONS FOR DSGE MODELS (2020)
Working Paper: The non-linear nature of country risk and its implications for DSGE models (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:250

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