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Pennsylvania Convention Center, 106-B
Hosted By:
Econometric Society
oil price swings, sovereign risk and macroeconomic performance of oil-exporting economies. We
show that even though being a bigger oil producer decreases sovereign risk–because it increases
a country’s ability to repay–having more oil reserves increases sovereign risk by making autarky
more attractive. We then develop a small open economy model of sovereign risk with incomplete
international financial markets, in which optimal oil extraction and sovereign default interact. We
use the model to understand the mechanisms behind the empirical facts and pay special attention
to understanding the macroeconomic effects of the terms-of-trade shocks or what is known in
the literature as the Harberger-Laursen-Metzler effect: there is a positive correlation between the
terms-of-trade shocks and the trade balance (current account) which declines as shock persistence
increases.
Capital Flows, Volatility, and Sovereign Debt
Paper Session
Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM
Commodity Prices and Sovereign Default: A New Perspective on The Harberger-Laursen-Metzler Effect
Abstract
In this paper we document the stylized facts about the relationship between internationaloil price swings, sovereign risk and macroeconomic performance of oil-exporting economies. We
show that even though being a bigger oil producer decreases sovereign risk–because it increases
a country’s ability to repay–having more oil reserves increases sovereign risk by making autarky
more attractive. We then develop a small open economy model of sovereign risk with incomplete
international financial markets, in which optimal oil extraction and sovereign default interact. We
use the model to understand the mechanisms behind the empirical facts and pay special attention
to understanding the macroeconomic effects of the terms-of-trade shocks or what is known in
the literature as the Harberger-Laursen-Metzler effect: there is a positive correlation between the
terms-of-trade shocks and the trade balance (current account) which declines as shock persistence
increases.
Learning About Debt Crises
Abstract
The recent European debt crisis presents a challenge to our understanding of the relationship between government bond yields and economic fundamentals. I argue that information frictions are an important missing element, and support that theory with empirical evidence on the evolution of forecast errors during the Great Recession. I build a quantitative model of sovereign default that features rare disasters and incomplete information about the country's economic outlook. Under a calibration to Portuguese economy, bond prices exhibit variable sensitivity to income shocks over time, a result of the markets' learning process about the underlying risk of economic depression.JEL Classifications
- A1 - General Economics