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A General Equilibrium Model of Sovereign Default and Business Cycles

A General Equilibrium Model of Sovereign Default and Business Cycles by Vivian Z. Yue
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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.
International Monetary Fund; July 2011
55 pages; ISBN 9781462357697
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Title: A General Equilibrium Model of Sovereign Default and Business Cycles
Author: Vivian Z. Yue; Enrique G. Mendoza
 
ISBNs
1462357695
9781462302222
9781462330454
9781462357697