Emerging market economies typically experience procyclical public expenditures and private consumption, countercyclical default risk, interest rate spreads, current account and inflation tax rates as well as and higher volatility in consumption than in output. We develop a quantitative stochastic dynamic equilibrium model of a small open economy with endogenous fiscal policy and endogenous default risk and country interest rate spreads that rationalizes these empirical findings. In a quantitative analysis, the calibrated model can account for an important fraction of the magnitude of the comovement of these macroeconomic variables that is observed in data
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
727.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:727
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Find related papers by JEL classification: F34 - International Economics - - International Finance - - - International Lending and Debt Problems F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics