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lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real … or spending. The price dynamics are driven solely by the liquidity premium on the debt …
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Our aim is to explore the role of financial aid in a default episode. To that end, we develop a dynamic stochastic quantitative model of sovereign default featuring fiscal policy, endogenous financial aid and risk-averse foreign lenders. After calibrating the model, we feed output shocks into...
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