The role of terms-of-trade shocks in driving economic fluctuations is revisited through a multisector small open economy model, where the various types goods can all be consumed and employed as inputs. Under this assumption, we show that, unlike conventional wisdom, may not necessarily trigger an boom for exporting country if its export are intensively or domestically, with limited scope substi...

We revisit the link between risk of sovereign default and costs. Contrary to prior literature, we show that higher costs may result in probabilities, lower bond prices, fiscal limits are not pinned down by economic fundamentals. Government debt sustainability depends on private investment behavior, which is affected expectations about defaults capital returns. argue this feedback loop gives ris...

In Krawczyk and Kim (Macroeconomics, 2009), we studied the problem of setting monetary policy in a closed economy using viability theory. Policies derived from the application of viability theory are ‘good enough’, rather than ‘optimal’. In this paper, we extend the analysis to a small open-economy model where the exchange rate becomes an additional channel for the transmission of monetary poli...