Specification of a Stochastic Simulation Model for Assessing Debt Sustainability in Emerging Market Economies

Author/Editor:

Philippe D Karam ; Douglas Hostland

Publication Date:

December 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper documents the specification of a model that was constructed to assess debt sustainability in emerging market economies. Key features of the model include external and fiscal sectors, which allow assessment of external and public debt in a unified framework; public and external debt, which both have an explicit maturity structure along with a distinction between denomination in domestic versus foreign currency to facilitate debt management analysis; monetary and fiscal policy, which are endogenous and specified using explicit forward-looking policy rules; an endogenous risk premium on public and external debt; and a mechanism for invoking a sudden stop in private capital flows. The paper provides an overview of the basic structure of the model, outlines the methodology used to calibrate the parameters, and illustrates the key properties of the model with reference to dynamic responses of selected variables to shocks of interest.

Series:

Working Paper No. 2006/268

Subject:

English

Publication Date:

December 1, 2006

ISBN/ISSN:

9781451865288/1018-5941

Stock No:

WPIEA2006268

Pages:

33

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