Seminario "Dollarization and Default Risk in Emerging Economies"
Miércoles 28/9, 17h
Presentado por Sebastián López Almirante
Abstract: This paper develops a small open economy model to study the interaction between dollarization and sovereign debt default. The adoption of a foreign currency demands for changes in real balances to be financed through either trade surplus or foreign debt issuance. In contrast to a non-dollarized regime, this alters the default and repayment sets of the economy by affecting incentives to default. How these are affected depends on the state of the economy in terms of level of indebtedness, real balances and output. I calibrate and solve the model using data from Ecuador which dollarized in 2000. The results suggest that dollarization seems to have a more positive than negative effect on default incentives in the sense of inducing repayment more often than default with respect to the non-dollarized regime. However, when feeding Ecuador's output as well as its initial asset and real balances positions to the model, it predicts that dollarization had pervasive effects on default incentives leading to a higher probability of default than if it had not dollarized.
Sebastian López Almirante