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A General Equilibrium Model of Sovereign Default and Business Cycles
Author:
Miss Zhanwei Z. Yue
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and
Mr. Enrique G. Mendoza null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 166
Language:
English
Publication Date:
01 Jul 2011
DOI:
https://doi.org/10.5089/9781462302222.001
ISBN:
9781462302222
ISSN:
1018-5941
Pages:
55
Keywords:
WP; debt ratio; working capital; Sovereign default; business cycles; country risk; external debt; default event; default frequency; default probability; credit market; transmission mechanism; result default; default incentive; country default; sensitivity analysis; utility function; default punishment; Total factor productivity; Labor supply; Debt default; Eastern Europe; Western Hemisphere; Western Europe; Africa
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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-noc 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 on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around 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 deraults, countercyclical spreads, high debt ratios, and key business cycle moments.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund