A General Equilibrium Model of Sovereign Default and Business Cycles

Enrique Mendoza and Vivian Yue

No 17151, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-hoc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around defaults, countercyclical spreads, high debt ratios, and key business cycle moments.

JEL-codes: E32 E44 F32 F34 (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
Note: IFM
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Citations: View citations in EconPapers (38)

Published as Enrique G. Mendoza & Vivian Z. Yue, 2012. "A General Equilibrium Model of Sovereign Default and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 889-946.

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Journal Article: A General Equilibrium Model of Sovereign Default and Business Cycles (2012)
Working Paper: A General Equilibrium Model of Sovereign Default and Business Cycles (2011)
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