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Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default)
This paper develops a New Keynesian model with sovereign debt and default. We focus on domestic interest rules governing monetary policy and external foreign currency government debt that is defaultable. Monetary policy and default risk interact as they both impact domestic consumption and production. We find that default risk generates monetary frictions, which amplify the monetary response to shocks. Large sovereign default risk depresses domestic consumption and production. These monetarydoi:10.3386/w26671 fatcat:tjsypktqivb2dkvior2uvpzf4q