Template-Type: ReDIF-Paper 1.0 
Title: The non-linear nature of country risk and its implications for DSGE models
Author-Name: Michał Brzoza-Brzezina 
Author-Name: Jacek Kotłowski 
Abstract: Country risk premia can substantially affect macroeconomic dynamics. We concentrateon one of their most important determinants - a country’s net foreign asset position and - in contrast to the existing research - investigate its nonlinear link to risk premia.The importance of this particular non-linearity is twofold. First, it allows to identifythe NFA level above which the elasticity becomes much (possibly dangerously) higher.Second, such a non-linear relationship is a standard ingredient of DSGE models, but itsproper calibration/ estimation is missing. Our estimation shows that indeed the link ishighly nonlinear and helps to identify the NFA position where the non-linearity kicksin at approximately -70% to -75% of GDP. We also provide a proper calibration of therisk premium - NFA relationship which can be used in DSGE models and demonstratethat its slope matters significantly for economic dynamics in such a model.
Number: 2018-035
Length: 34 pages 
Creation-Date: 2018-05
Keywords: risk premium, PSTR model, open economy DSGE model
Classification-JEL: C23, E43, E44
File-URL: https://hdl.handle.net/20.500.12182/1163
File-Format: Application/pdf
DOI: 10.33119/kaewps2018035
Handle: RePEc:sgh:kaewps:2018035