## 2. Parameter Values for Entrepreneurial Sector

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---

### Model features and transmission channels
- Two-country sticky-price DSGE with explicit trade and financial linkages between a small open economy (SOE) and the rest of the world (ROW).
- Financial frictions: financial accelerator with microfoundations; external finance premium derived from an optimal contracting problem between borrower and lender.
- Borrowing in foreign currency creates balance sheet effects: exchange rate depreciation raises real debt burden for leveraged entrepreneurs/households.
- Incomplete exchange rate pass-through due to pricing-to-market behavior and nominal price rigidities.
- Sudden stops modeled as a change in lenders’ perception of entrepreneurs’ productivity (perception factor tϖ), generating endogenous repricing of credit risk and spillovers via trade and finance.

### Calibration — consumption, production, and monetary policy (selected values)
- Discount factor, β = 0.99 (quarterly frequency; implies a riskless annual return of approximately 4 percent in steady state).
- Inverse intertemporal elasticity of substitution, σ = 1.
- Inverse elasticity of labor supply, ϕ = 2.
- Degree of openness, (1-α) = 0.25.
- Share of capital in production, η = 0.35.
- Elasticity of substitution among differentiated domestic goods, λ = 11 (implies flexible-price mark-up of 1.1).
- Quarterly depreciation rate, δ = 0.025.
- Share of entrepreneurial labor, Ω = 0.01.
- Share of exports in foreign demand, *α = 0.1.
- Foreign demand price elasticity, *γ = 1.
- Policy rule parameter (original Taylor estimates) set as 5.1==π_ε.

### Entrepreneurial sector — parameter values (SOE and ROW)
- SOE leverage ratio, κ = 0.9.
- SOE monitoring cost parameter, μ = 0.2.
- Steady-state quarterly external risk premium (SOE), Φ = 185 basis points.
- Implied SOE entrepreneur survival rate, ϑ ≈ 98.73 percent.
- ROW leverage ratio = 0.5.
- ROW steady-state quarterly external risk premium, Φ* = 0.005.
- ROW monitoring cost, μ* = 0.12.
- Implied ROW entrepreneur survival rate ≈ 99.66 percent.
- Persistence of perception shock, ϖρ = 0.5.
- Baseline degree of financial integration, ξ = 1.

### Optimal contracting and external finance premium (key relations)
- Entrepreneurs transform unfinished capital into finished capital subject to idiosyncratic productivity ω with E(ω)=1 and log-normal specification for ω.
- Lenders observe a perceived productivity ω* = ϖ·ω with perception factor ϖ (misperception over [0,1]); ϖ follows ln(ϖt) − ln(ϖ̄) = ϖρ [ln(ϖt−1) − ln(ϖ̄)] + ξ·ϖε + ϖξ (notation as in source).
- Participation constraint for foreign lenders links expected contractual return to the world interest rate, *i:
  - Equilibrium lending condition: [1 + Φt+1]Et(REt+1) = (1 + *it+1)·(St+1), where Φ is the external risk premium (equations (26)-(28) in source).
- External risk premium Φ depends explicitly on the entrepreneurs’ leverage ratio: leverage = (Et+1/((1+rt)KQt+1/DS_t)) (as detailed in text and Appendix).
- Monitoring cost v is a function of μ and distributional integrals (see Appendix definitions of G and Γ).

### Scenario analysis — shocks and quantitative responses
- Shock specification for impulse responses: a 2 percent (negative) misperception shock to lenders’ perception (domestic or ROW).
- Main comparative findings:
  - A domestic-origin financial shock (2 percent negative misperception) raises the external risk premium on impact, reduces external financing and investment, lowers output and CPI inflation, and leads to nominal and real exchange rate depreciation. Export channel partly offsets domestic demand loss if crisis is domestic.
  - A ROW-origin (global) financial shock of the same magnitude produces larger adverse effects in the SOE: falls in capital, investment, and output are larger; decline in foreign borrowing is about twice the size compared with a domestic shock; depreciation and movements in inflation, asset prices, and employment are more pronounced.
- Amplification mechanisms for global shock:
  - Trade channel: contraction in ROW output reduces SOE net exports despite larger SOE depreciation, worsening SOE GDP.
  - Financial spillovers: deterioration in ROW investor perceptions transmits to the SOE’s perceived risk, raising SOE external risk premium and tightening credit conditions.
- Integration sensitivities:
  - Greater trade openness (higher 1-α) amplifies the SOE’s response to a global financial shock; simulations with 1-α = 0.25, 0.35, 0.5 show larger declines in output, investment, net worth, and larger risk-premium movements for more open economies.
  - Greater financial integration (higher ξ) increases the magnitude of financial spillovers and amplifies macroeconomic contractions in the SOE for a ROW-origin shock (simulated ξ = 0, 0.5, 1).

### Policy-relevant conclusions (from model results)
- Small open economies exposed to a global financial shock are likely to experience deeper and more prolonged crises than when shocks are domestic in origin because the export channel fails to provide a recovery boost when ROW demand contracts.
- Exchange rate depreciation provides a partial offset to domestic-origin crises via a current-account reversal; this beneficial channel is absent or reversed under a global shock.
- Higher degrees of trade openness and financial integration increase an economy’s vulnerability to adverse global financial shocks in this framework.

*Source: _wp10158 - 2. Parameter Values for Entrepreneurial Sector (IMF working paper PDF).*

### References      ........................................................................................................

### References      ..........................................................................................................................32

### Figures
- 1. Dynamic Responses to a Financial Crisis in Domestic Economy:  
  Domestic Economy ...................................................................................................24
- 2. Dynamic Responses to a Financial Crisis in ROW: Domestic Economy ......................25
- 3. Dynamic Responses to a Financial Crisis in ROW: ROW ............................................26
- 4. Dynamic Responses to a Financial Crisis in ROW: Domestic Economy ......................27
- 5. Dynamic Responses to a Financial Crisis in ROW: Domestic Economy ......................28

### Tables
- 1. Parameter Values for Consumption, Production Sectors and Monetary Policy ............19

*Source: _wp10158 - References*

### 2. Parameter Values for Entrepreneurial Sector ................................................................20

### 2. Parameter Values for Entrepreneurial Sector

### Model features and transmission channels
- Two-country sticky-price DSGE with explicit trade and financial linkages between a small open economy (SOE) and the rest of the world (ROW).
- Financial frictions: financial accelerator with microfoundations; external finance premium derived from an optimal contracting problem between borrower and lender.
- Borrowing in foreign currency creates balance sheet effects: exchange rate depreciation raises real debt burden for leveraged entrepreneurs/households.
- Incomplete exchange rate pass-through due to pricing-to-market behavior and nominal price rigidities.
- Sudden stops modeled as a change in lenders’ perception of entrepreneurs’ productivity (perception factor tϖ), generating endogenous repricing of credit risk and spillovers via trade and finance.

### Calibration — consumption, production, and monetary policy (selected values)
- Discount factor, β = 0.99 (quarterly frequency; implies a riskless annual return of approximately 4 percent in steady state).
- Inverse intertemporal elasticity of substitution, σ = 1.
- Inverse elasticity of labor supply, ϕ = 2.
- Degree of openness, (1-α) = 0.25.
- Share of capital in production, η = 0.35.
- Elasticity of substitution among differentiated domestic goods, λ = 11 (implies flexible-price mark-up of 1.1).
- Quarterly depreciation rate, δ = 0.025.
- Share of entrepreneurial labor, Ω = 0.01.
- Share of exports in foreign demand, *α = 0.1.
- Foreign demand price elasticity, *γ = 1.
- Policy rule parameter (original Taylor estimates) set as 5.1==π_ε.

### Entrepreneurial sector — parameter values (SOE and ROW)
- SOE leverage ratio, κ = 0.9.
- SOE monitoring cost parameter, μ = 0.2.
- Steady-state quarterly external risk premium (SOE), Φ = 185 basis points.
- Implied SOE entrepreneur survival rate, ϑ ≈ 98.73 percent.
- ROW leverage ratio = 0.5.
- ROW steady-state quarterly external risk premium, Φ* = 0.005.
- ROW monitoring cost, μ* = 0.12.
- Implied ROW entrepreneur survival rate ≈ 99.66 percent.
- Persistence of perception shock, ϖρ = 0.5.
- Baseline degree of financial integration, ξ = 1.

### Optimal contracting and external finance premium (key relations)
- Entrepreneurs transform unfinished capital into finished capital subject to idiosyncratic productivity ω with E(ω)=1 and log-normal specification for ω.
- Lenders observe a perceived productivity ω* = ϖ·ω with perception factor ϖ (misperception over [0,1]); ϖ follows ln(ϖt) − ln(ϖ̄) = ϖρ [ln(ϖt−1) − ln(ϖ̄)] + ξ·ϖε + ϖξ (notation as in source).
- Participation constraint for foreign lenders links expected contractual return to the world interest rate, *i:
  - Equilibrium lending condition: [1 + Φt+1]Et(REt+1) = (1 + *it+1)·(St+1), where Φ is the external risk premium (equations (26)-(28) in source).
- External risk premium Φ depends explicitly on the entrepreneurs’ leverage ratio: leverage = (Et+1/((1+rt)KQt+1/DS_t)) (as detailed in text and Appendix).
- Monitoring cost v is a function of μ and distributional integrals (see Appendix definitions of G and Γ).

### Scenario analysis — shocks and quantitative responses
- Shock specification for impulse responses: a 2 percent (negative) misperception shock to lenders’ perception (domestic or ROW).
- Main comparative findings:
  - A domestic-origin financial shock (2 percent negative misperception) raises the external risk premium on impact, reduces external financing and investment, lowers output and CPI inflation, and leads to nominal and real exchange rate depreciation. Export channel partly offsets domestic demand loss if crisis is domestic.
  - A ROW-origin (global) financial shock of the same magnitude produces larger adverse effects in the SOE: falls in capital, investment, and output are larger; decline in foreign borrowing is about twice the size compared with a domestic shock; depreciation and movements in inflation, asset prices, and employment are more pronounced.
- Amplification mechanisms for global shock:
  - Trade channel: contraction in ROW output reduces SOE net exports despite larger SOE depreciation, worsening SOE GDP.
  - Financial spillovers: deterioration in ROW investor perceptions transmits to the SOE’s perceived risk, raising SOE external risk premium and tightening credit conditions.
- Integration sensitivities:
  - Greater trade openness (higher 1-α) amplifies the SOE’s response to a global financial shock; simulations with 1-α = 0.25, 0.35, 0.5 show larger declines in output, investment, net worth, and larger risk-premium movements for more open economies.
  - Greater financial integration (higher ξ) increases the magnitude of financial spillovers and amplifies macroeconomic contractions in the SOE for a ROW-origin shock (simulated ξ = 0, 0.5, 1).

### Policy-relevant conclusions (from model results)
- Small open economies exposed to a global financial shock are likely to experience deeper and more prolonged crises than when shocks are domestic in origin because the export channel fails to provide a recovery boost when ROW demand contracts.
- Exchange rate depreciation provides a partial offset to domestic-origin crises via a current-account reversal; this beneficial channel is absent or reversed under a global shock.
- Higher degrees of trade openness and financial integration increase an economy’s vulnerability to adverse global financial shocks in this framework.

*Source: _wp10158 - 2. Parameter Values for Entrepreneurial Sector (IMF working paper PDF).*

### REFERENCES

### REFERENCES

### Financial crises, sudden stops, and balance-sheet effects
- Calvo, G., A. Izquierdo, and L. F. Mejía, 2004, “On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects,” NBER Working Paper, No. 10520 (Cambridge, Massachusetts: MIT Press).
- Calvo, G., A. Izquierdo, and R. Loo-Kung, 2006, “Relative Price Volatility under Sudden Stops: The Relevance of Balance Sheet Effects,” Journal of International Economics, 69(1), pp. 231–254.
- Braggion, F., L. J. Christiano and J. Roldos, 2009, “Optimal Monetary Policy in a Sudden Stop,” Journal of Monetary Economics, Vol. 56, No. 4, pp. 582‒95.
- Curdia, V., 2007, “Monetary Policy Under Sudden Stops,” Staff Report No. 278 (New York: Federal Reserve Bank of New York).
- Curdia, 2008, “Optimal Monetary Policy under Sudden Stops,” Staff Report No. 323 (New York: Federal Reserve Bank of New York).
- Bleaney M., 2005, “The Aftermath of a Currency Collapse: How Different are Emerging Markets?” The World Economy, Vol. 28, No. 1, pp. 79–89.
- Kaminsky, G.L., and C.M. Reinhart, 2000, “On Crisis, Contagion, and Confusion,” Journal of International Economics, Vol. 51, pp. 145–168.
- Moser, T., 2003, “What is International Financial Contagion?” International Finance, Vol. 6, pp. 157–178.

### Exchange rates, currency denomination, and financial fragility
- Eichengreen, B. and R. Hausmann, 1999, “Exchange Rates and Financial Fragility,” NBER Working Paper, No. 7418 (Cambridge, Massachusetts: MIT Press).
- Eichengreen, B. and R. Hausmann, 2005, “Other People's Money: Debt Denomination and Financial Instability in Emerging Market Economies” (University of Chicago Press).
- Cespedes, L. F., R. Chang, and A. Velasco, 2004, “Balance Sheets and Exchange Rate Policy,” American Economic Review, Vol. 94, pp. 1183–1193.
- Devereux, M. B., P. R. Lane, and J. Xu, 2006, “Exchange Rates and Monetary Policy in Emerging Market Economies,” The Economic Journal, Vol. 116, pp. 478–506.
- Hausmann, R., U. Panizza, and E. Stein, 2001, “Why Do Countries Float the Way They Float?” Journal of Development Economics, Vol. 66, pp. 387–414.
- Mishkin, F. S., 1998, “The Dangers of Exchange Rate Pegging in Emerging Market Countries,” International Finance, Vol. 1, No. 1, pp. 81–101.
- Campa, J. and L. Goldberg, 2005, “Exchange Rate Pass-Through into Import Prices,” Review of Economics and Statistics, Vol. 87, No. 4, pp. 679‒90.
- Goldberg, P. K., and M. Knetter, 1997, “Goods Prices and Exchange Rates: What Have We Learned?” Journal of Economic Literature, Vol. 35, No. 3, pp. 1243–1272.
- Naug, B., and R. Nymoen, 1996, “Pricing to Market in a Small Open Economy,” Scandinavian Journal of Economics, Vol. 98, No. 3, pp. 329–350.

### Monetary policy, financial accelerator, and macroeconomic dynamics
- Bernanke, B. and M. Gertler, 1989, “Agency Costs, Net Worth and Business Fluctuations,” American Economic Review, Vol. 79, pp. 14–31.
- Bernanke, M. Gertler, and S. Gilchrist, 1999, “The Financial Accelerator in a Quantitative Business Cycle Framework,” in Handbook of Macroeconomics, Vol. 1C, Chapter 21, ed. by J. B. Taylor and M. Woodford (Amsterdam: North-Holland).
- Gertler, M., S. Gilchrist, and F. Natalucci, 2007, “External Constraints on Monetary Policy and the Financial Accelerator,” Journal of Money, Credit and Banking, Vol. 39, pp. 295–330.
- Christiano, L. J., C. Gust, and J. Roldos, 2004, “Monetary Policy in a Financial Crisis,” Journal of Economic Theory, Vol. 119, No. 1, pp. 64‒103.
- Carlstrom, C.T. and T. S. Fuerst, 1997, “Agency Costs, Net Worth, and Business Cycle Fluctuations: A Computable General Equilibrium Analysis,” American Economic Review, Vol. 87, pp. 893‒910.
- Kiyotaki, N. and J. Moore, 1997, “Credit Cycles,” Journal of Political Economy, Vol. 105, pp. 211–248.
- Martin, P., and H. Rey, 2006, “Globalization and Emerging Markets: With or Without Crash?” American Economic Review, Vol. 96, No. 5, pp. 1631–1651.
- Schmitt-Grohe, S. and M. Uribe, 2003, “Closing Small Open Economy Models,” Journal of International Economics, Vol. 61, pp. 163–185.
- G. International Monetary Fund, 2010, “Rebalancing Growth” in World Economic Outlook (Washington, April).

### Pricing, sticky prices, and microfoundations
- Rotemberg, J., 1982, “Sticky Prices in the United States,” Journal of Political Economy, Vol. 90, 1187–1211.
- Goldberg, P. K., and M. Knetter, 1997, “Goods Prices and Exchange Rates: What Have We Learned?” Journal of Economic Literature, Vol. 35, No. 3, pp. 1243–1272.
- Naug, B., and R. Nymoen, 1996, “Pricing to Market in a Small Open Economy,” Scandinavian Journal of Economics, Vol. 98, No. 3, pp. 329–350.

### Decision theory, incentives, and contract design
- Gilboa, I. and D. Schmeidler, 1989, “Maxmin Expected Utility with Non-Unique Prior,” Journal of Mathematical Economics, Vol. 18, pp. 141–53.
- Gale, D. and M. Hellwig, 1985, “Incentive-Compatible Debt Contract: The One-Period Problem,” Review of Economic Studies, Vol. 52, pp. 647–63.

### Methodology and computational approaches
- Sims, C., 2005, “Second-Order Accurate Solution of Discrete Time Dynamic Equilibrium Models,” Mimeo (Princeton University Press).
- Braggion, F., L. J. Christiano and J. Roldos, 2009, “Optimal Monetary Policy in a Sudden Stop,” Journal of Monetary Economics, Vol. 56, No. 4, pp. 582‒95.
- Christiano, L. J., C. Gust, and J. Roldos, 2004, “Monetary Policy in a Financial Crisis,” Journal of Economic Theory, Vol. 119, No. 1, pp. 64‒103.

*Source: _wp10158 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10158.pdf_