Working Paper: NBER ID: w9160
Authors: Assaf Razin; Efraim Sadka
Abstract: We develop a stylised model of multiple equilibria, with country risk spreads at the focus of the analysis. Fears that the country default on its debt triggers a reversal in the direction of inflows of international financial capital raise interest-rate spreads and thus the cost of servicing the public debt. The analytical framework is standard: creditors observe the output of borrowing only at a cost.
Keywords: Brazil; debt crisis; macroeconomic fundamentals; political factors; credit risk
JEL Codes: E63; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sound macroeconomic fundamentals (E66) | lower risk premium (G19) |
| sound macroeconomic fundamentals (E66) | good equilibrium (D50) |
| bad equilibrium (D59) | high public debt service (H63) |
| political factors shift market expectations (P23) | bad equilibrium (D59) |
| political factors shift market expectations (P23) | self-fulfilling cycle of increased credit risk (E44) |
| self-fulfilling cycle of increased credit risk (E44) | reduced capital inflows (F32) |
| reduced capital inflows (F32) | exacerbated economic situation (F69) |