A General Equilibrium Model of Sovereign Default and Business Cycles

IMF Working Papers, July 1, 2011

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A General Equilibrium Model of Sovereign Default and Business Cycles

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Bibliographic details

• Authors: Zhanwei Z. Yue, Enrique G. Mendoza
• Published: July 1, 2011
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781462302222.001

Model framework and mechanism

• Proposes a general equilibrium model integrating both sovereign default and business cycles.
• Some imported inputs require working capital financing.
• Default on public and private obligations occurs simultaneously.
• Efficiency loss arises when imported inputs are replaced by imperfect substitutes around default triggers.

Key explanatory results

• The model explains several features of cyclical dynamics around defaults.
• Accounts for countercyclical spreads.
• Accounts for high debt ratios observed in emerging markets.
• Matches key business cycle moments.

Subject areas and keywords

• Subject: Debt default, External debt, Labor, Labor supply, Production, Public debt, Total factor productivity
• Keywords: Africa, business cycles, country default, country risk, credit market, Debt default, debt ratio, default event, default frequency, default incentive, default probability, default punishment, Eastern Europe, external debt, Labor supply, result default, sensitivity analysis, Sovereign default, Total factor productivity, transmission mechanism, utility function, Western Europe, Western Hemisphere, working capital, WP

Content in this bundle

• _wp11166 — Introduction, Model, Calibration, and Quantitative Results
  • _wp11166 — Introduction, Model, Calibration, and Quantitative Results (Markdown version)
  • _wp11166 — Introduction, Model, Calibration, and Quantitative Results (PDF)