Sovereign risk and Dutch disease

Arbeitspapier

I study how, in the presence of default risk, the Dutch disease amplifies an inefficiency in the sectoral allocation of capital. I develop a sovereign default model with production of tradable and non-tradable goods, and endowments of commodities. Default incentives increase when more capital is allocated to non-traded production. Households do not internalize this effect, giving rise to over-investment in the non-traded sector. Commodity windfalls amplify this inefficiency through the classic Dutch disease mechanism and an increased desire to borrow. Policies that reduce the returns of non-traded capital, such as exchange rate sterilization, ameliorate the degree of over-investment during commodity windfalls. Evidence from spreads, commodity endowments, and exchange rate data supports the main findings of the model.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2024-03

Classification and Topics

• Classification: Wirtschaft ; International Lending and Debt Problems ; Open Economy Macroeconomics ; National Debt; Debt Management; Sovereign Debt
• Subject: Sovereign default ; Dutch disease ; real exchange rates

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Esquivel, Carlos
• Event: Veröffentlichung
• (who): Rutgers University, Department of Economics
• (where): New Brunswick, NJ
• (when): 2024

Further information

• Handle: http://hdl.handle.net/10419/283998
• Last update: 10.03.2025, 11:42 AM CET