Sovereign risk and real business cycles in a small open economy

Borradores de Economia
Number: 
226
Published: 
Classification JEL: 
E52, E58, E31
Keywords: 
Human capital agglomeration, Social returns, Private returns, Externalities, Uncertainty, Fiscal policy
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This paper investigates the effect of sovereign risk on the stochastic rational expectations equilibrium of a real business cycle small open economy. The market is imperfect because the sovereign cannot commit to repay its outstanding debt and chooses to