Emerging economies tend to experience larger political uncertainty and more default episodes than developed countries. This paper studies the effect of political risk on sovereign default and interest rate spreads in emerging markets. The paper develops a quantitative model of sovereign debt and default under political risk in a small open economy that captures some of the main empirical regularities in emerging economies: default occurs in equilibrium and interest rate spreads and default risk are countercyclical.More polarized economies experience higher default rates and larger level and volatility of spreads. Also consistent with empirical evidence, the quantitative analysis shows that higher levels of political uncertainty significantly raise the default frequency and both the level and volatility of spreads.

Emerging market economies typically exhibit a procyclical fiscal policy: public expenditures rise (fall) in economic expansions (recessions), whereas tax rates rise (fall) in bad (good) times. Additionally, the business cycle of these economies is characterized by countercyclical default risk. In this paper we develop a quantitative dynamic stochastic small open economy model with incomplete markets, endogenous fiscal policy and sovereign default where public expenditures and tax rates are optimally procyclical. The model also accounts for the dynamics of other key macroeconomic variables in emerging economies.

Emerging market economies typically exhibit a procyclical fiscal policy: public expenditures rise (fall) in economic expansions (recessions), whereas tax rates rise (fall) in bad (good) times. Additionally, the business cycle of these economies is characterized by countercyclical default risk. In this paper we develop a quantitative dynamic stochastic small open economy model with incomplete markets, endogenous fiscal policy and sovereign default where public expenditures and tax rates are optimally procyclical. The model also accounts for the dynamics of other key macroeconomic variables in emerging economies. JEL classification: E62, F34, F41.

We develop a two-country DSGE model with global banks to analyze the role of crossborder banking flows on the transmission of a quality of capital shock in the United States to emerging market economies (EMEs). Banks face a moral hazard problem for borrowing from households. EME's banks might be risky: they can also be constrained to borrow from U.S. banks. A negative quality of capital shock in the United States generates a global financial crisis. EME's macroprudential policy that targets non-core liabilities makes the domestic economy resilient to the volatility of cross-border banking flows and makes EME's households better-off.

ResumenEn este trabajo se presenta una descripción de los principales hechos estilizados del ciclo económico en México. El propósito es tener un marco de referencia cuantitativo para evaluar modelos dinámicos de equilibrio general que busquen explicar el ciclo en México. Para describir las propiedades del ciclo económico se siguió la metodología de Kydland y Prescott. Se documentó la volatilidad de diferentes variables macroeconómicas, así como su correlación con el PIB. Con el propósito de analizar posibles cambios en las propiedades del ciclo económico mexicano, el periodo de análisis se dividió en dos sub-periodos, 1980-1998 y 1999-2006. El primero se caracteriza por una alta inestabilidad económica y el segundo incluye al ciclo económico completo más reciente y se distingue por una mayor estabilidad macroeconómica.