European Parliament Library

A General Equilibrium Model of Sovereign Default and Business Cycles, Zhanwei Yue, Enrique Mendoza

Contributor
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-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
Table Of Contents
Cover; Contents; 1. Introduction; Figures; Figure 1: Macroeconomic Dynamics around Sovereign Default Events; 2. A Model of Sovereign Default and Business Cycles; 2.1 Households; 2.2 Final Goods Producers; 2.3 Intermediate Goods Producers; 2.4 Equilibrium in Factor Markets and Production; 2.5 The Sovereign Government; 2.6 Foreign Lenders; Tables; Table 1: Sovereign and Corporate Interest Rates; 2.7 Recursive Equilibrium; Figure 2: Sovereign Bond Interest Rates and Median Firm Financing Costs; 3. Country Risk and Default Costs in Partial Equilibrium
Language
eng
Literary Form
non fiction
Note
Description based upon print version of record
Physical Description
1 online resource (57 p.)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781462332472

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