Abstract

GIL LEON, José Mauricio  and  SUAREZ CANTE, Andrés Felipe. Implications of risk premium shocks in a small and open economy. Lect. Econ. [online]. 2020, n.92, pp.133-172. ISSN 0120-2596.  https://doi.org/10.17533/udea.le.n92a05.

This paper aims to identify the transmission channel of risk premium shocks in different macroeconomic variables. Therefore, a DSGE model for a small and open economy is formulated, which considers the behavior of households, investment decisions by companies, the reaction function of the central bank and the dynamics of the different external variables, such such as the variation of the country’s net foreign assets and foreign trade. The model is calibrated with data from the Colombian economy of the 2005-2017 period. In the simulation results, the persistence of the risk premium shock in the endogenous variables that make up the model is identified, and in particular, outstanding effects of the shock on the exchange rate, the interest rate and inflation are observed. It is concluded that the size of the elasticity of the risk premium to external indebtedness dominates the force with which the shocks affect the economy.

Keywords : DSGE models; risk premium; interest rate; exchange rate.

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