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Working Papers

December 2006, No. 06-11

Computing Business Cycles in Emerging Economy Models

Juan Carlos Hatchondo, Leonardo Martinez and Horacio Sapriza

(For an updated version of this working paper, see WP 10-04)

We show that computing business cycles in emerging economy models using the discrete state space technique may be misleading. We solve the models of sovereign default presented by Aguiar and Gopinath (2006) using interpolation. We find that the simulated behavior of the spread is quite different from the behavior obtained using discrete state space. In fact, some of the results obtained by Aguiar and Gopinath (2006) using discrete state space are reversed when using interpolation. Our analysis thus provides a new set of benchmark results for quantitative models of sovereign default.

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