Numerical Exercise on Devaluation and Debt Repudiation

Abstract

The paper extends the Gylfason and Schmid model to analyze the effects of devaluation and debt repudiation on a post—crisis economy. Simulation experiments were conducted using this model. The numerical results indicate that devaluation can be contractionary but repudiation can dampen the negative effects of a devaluation. Devaluation can be expansionary in the model depending on the amount of imported intermediate input use and/or on the value of the substitution elasticity.