Alejandro García Cintado

A fall in commodity receipts can contract domestic production when firms rely on imported inputs and foreign exchange is rationed at a stabilized exchange rate. We study this mechanism in a small open economy calibrated to Trinidad and Tobago. Energy prices and energy-sector activity follow their observed quarterly paths through 2018Q4, with each realization entering agents' information set when it occurs. The model links productive-import availability to energy receipts and official reserves and allows for downward nominal wage rigidity. Fiscal programs and targeted FX sales are compared at a common initial scale.When a quarter-5 fiscal program is revealed as disbursement begins, public investment generates the largest cumulative response among the fiscal instruments. Announcing the same program in quarter 1 sharply reduces its effectiveness: in the benchmark model, the twenty-quarter responses of public consumption and public investment turn negative. The sign reversal survives with flexible wages, so anticipation and expected input scarcity are sufficient to generate it. Targeted FX provision raises output by relaxing the productive constraint directly, while rebuilding reserves withdraws part of the initial support later. Average output returns to FX provision decline with program size. Downward nominal wage rigidity cushions the initial contraction but leaves average non-energy output over the first twenty quarters 1.04 percentage points lower than under flexible wages. A first-order approximation preserves the main fiscal ranking and the announcement penalty, but some FX-policy effects are sensitive to local approximation.

We study how directed credit changes monetary transmission and the incidence of fiscal stress in a small open economy calibrated to Brazil. Private banks choose lending rates through a dynamic pricing problem that accounts for funding costs and bank capital. Eligible firms combine market loans with directed finance in tradable and nontradable production. A fiscal transfer that raises the public debt-to-GDP ratio by ten percentage points increases eligible firms' financing rates by 2.1 and 2.8 quarterly basis points, compared with 7.6 for market-dependent firms. Sovereign risk affects lending rates through external financial conditions and the adjustments they induce in domestic funding costs and bank capital. Whether market-dependent firms face a larger increase than in an economy with market credit depends on banks' sovereign portfolios and the equilibrium response of financing conditions. Financial incidence is pronounced, while aggregate output differences are moderate in the calibrations considered. Following a monetary innovation, directed credit raises discounted squared inflation deviations and lowers squared output deviations; the ranking of total stabilization losses depends on policy weights.

We study how sovereign risk weights shape monetary-policy transmission to bank credit in an emerging-market small open economy. In a New Keynesian DSGE model calibrated to Brazil, a representative bank holds long-duration government bonds and floating-rate debt indexed to the Selic rate while facing a regulatory capital floor. A monetary tightening lowers long-bond prices, generating mark-to-market losses that erode bank capital. With low sovereign risk weights, these losses reduce capital without commensurately reducing risk-weighted assets; once the floor binds, the bank contracts private credit.The central result is an activation frontier in sovereign exposure and the effective capital buffer. On its slack side, tightening has muted balance-sheet effects; on its constrained side, credit contracts sharply, by an order of magnitude more under zero than under full sovereign risk weights. Using supervisory data, a direct-securities upper bound places Brazil near the threshold, while a repo-inclusive proxy lies inside the constrained region. Selic-indexed debt attenuates the channel by reducing duration exposure. For the same cumulative disinflation, front-loaded tightening generates larger losses than gradual tightening, especially when bank portfolios are tilted toward long-duration debt.In a two-constraint extension, bank-capital stress makes the borrower collateral constraint more likely to bind and more persistent. Deleveraging, however, reduces risk-weighted assets and partially relaxes the bank floor. The constraints are complementary in the incidence and persistence of borrower collateral stress, but their interaction attenuates peak credit and output losses. The mechanism requires neither sovereign default nor risk mispricing; the sovereign risk weight remains the key policy margin.

We study how sovereign risk weights shape the transmission of monetarypolicy to bank credit in an emerging-market small open economy. In a New KeynesianDSGE model calibrated to Brazil, a representative bank holds long-duration nominalgovernment bonds and floating-rate government debt indexed to the central bank'spolicy rate (the Selic rate), while facing a regulatory capital floor. A monetarytightening lowers the price of long bonds, generating mark-to-market losses thaterode bank capital. When sovereign debt carries a low risk weight, these losses reducethe numerator of the capital ratio without commensurately reducing risk-weightedassets; once the floor binds, the bank contracts private credit.The central result is an activation frontier in the space of sovereign exposureand the effective capital buffer. Below the frontier, the same tightening has mutedbalance-sheet effects; above it, credit contracts sharply, with a contraction an orderof magnitude larger when sovereign debt is zero-weighted than when it is fullyweighted. Mapping supervisory balance-sheet data into the model, direct securitiesholdings place the Brazilian banking system near the activation threshold, while abroader repo-inclusive exposure measure places it inside the constrained region. Twofurther results sharpen the mechanism. A larger share of policy-rate-indexed debtattenuates the channel by reducing duration exposure. For the same cumulativedisinflation, a front-loaded tightening produces larger duration losses and a strongercredit contraction than a gradual one, especially when the bank portfolio is tiltedtoward long-duration debt. The mechanism does not rely on sovereign-risk mispricing,distorted beliefs, default shocks, or disaster shocks. The key policy margin is thesovereign risk weight itself rather than the fine design of a smooth macroprudentialrule.

This paper studies a general mechanism through which fiscal news can triggersovereign bond-market stress: when leveraged non-bank investors hold long-durationsovereign debt subject to collateral constraints, the same repricing of durationrisk that raises yields can also force asset sales and generate a self-reinforcingliquidity premium. We develop a small open economy New Keynesian model thatcombines two distinct intermediation frictions in the long-bond market. Patientarbitrageurs price duration risk, so that net duration supply moves the termpremium; constrained dealers price the immediacy of forced-sale flows, so thatinventory absorption moves a separate liquidity premium. Leveraged non-bankinvestors face an occasionally binding collateral constraint: unfunded fiscal newsraises expected deficits, public debt, and duration-risk supply, loweringlong-bond prices, tightening collateral conditions, and, once inherited pressurecrosses a threshold, triggering forced sales that dealers absorb only at a cost.The model separates four components of bond-market stress: expectations-hypothesisrepricing, a term/duration premium, a fiscal credibility/default premium, and amarket-functioning liquidity premium. We use the 2022 UK gilt-market crisis, inwhich liability-driven investment (LDI) funds were forced to sell gilts into afalling market, as the motivating laboratory for the calibration. In the baselinecalibration, the unfunded fiscal-news shock activates the collateral constraint,raises the peak long yield by about 155 basis points, generates a liquiditypremium of about 60 basis points, and lowers output by about 0.8 percent at thetrough. A high-buffer counterfactual that keeps the fiscal shock unchanged butprevents the constraint from binding reduces the peak long-yield response by about53 basis points and the output loss by about 0.34 percentage points. A central-bankmarket-functioning backstop sharply compresses the liquidity premium and forcedsales while leaving the fiscal-risk and term-premium components essentiallyunchanged. A key result is that financial amplification and real transmission arepartial substitutes: when private demand is less exposed to long rates, the samefire-sale loop shows up mainly in yields, whereas stronger long-rate exposureabsorbs part of the shock as a demand contraction. The mechanism is not specificto the UK episode; it applies wherever leveraged non-bank investors hold safelong-duration assets against binding collateral.

This paper studies how credit-market segmentation affects monetary transmission and stabilization trade-offs in a small open economy facing fiscal-financial stress. In many emerging economies, a significant share of private borrowing is supplied through directed, regulated, earmarked, subsidized, or publicly supported credit lines that are only partially exposed to the policy rate. We embed this protected-credit segment into a tradable--nontradable small open economy with sticky nontradable prices, working-capital finance,sovereign-financial spreads, and inflation-targeting monetary policy.The model compares a market-credit benchmark, an economy with a structural protected-credit segment, and an economy in which protected credit expands endogenously under stress. Credit-market segmentation weakens aggregate monetary pass-through because part of borrowing is insulated from policy-rate increases. As a result, the central bank raises the policy rate more aggressively, but the effective borrowing rate responds less than in the market-credit benchmark. Protected credit therefore cushions real activity and privateconsumption, while making nominal stabilization less effective.The cost is fiscal-financial. Under the Brazil-disciplined benchmark calibration, economies with protected credit experience smaller realcontractions but higher inflation, stronger nominal depreciation, wider sovereign-financial spreads, positive parafiscal subsidy costs, and greater public-debt stress. The main quantitative discontinuity is between the market-credit economy and economies with a structural protected-credit segment; stress-contingent protected-credit expansion provides additional but moderate amplification. Credit-market segmentation is therefore not a clean aggregate stabilizer: it protects selected borrowers, but shifts the stabilization burden toward inflation, the exchange rate, sovereign spreads, and the fiscal-parafiscal block.

Should macroprudential policy respond to fiscal conditions and, if so, to which fiscal financial state variable? We study this question in a medium-scale DSGE model with heterogeneous households, banking frictions, and an occasionally binding housingcollateral constraint. In a benchmark architecture in which patient households are the residual holders of government bonds, fiscally contingent debt-aware macroprudential policy dampens leverage-driven amplification, lowers GDP-scaled present-value spending multipliers, and raises welfare.Our main result emerges in the sovereign–bank architecture, where banks hold sovereign bonds and fiscal deterioration affects private intermediation through bank sovereign exposure. In that environment, reacting to aggregate public debt is too coarse: it worsens collateral dynamics and lowers welfare. By contrast, a nexus-based rule conditioned on sovereign exposure relative to bank capital improves financial stabilization, mitigates collateral stress, lowers fiscal multipliers, and raises welfare. The main lesson is that debt awareness is not architecture-invariant: once sovereign risk is intermediated by banks, the relevant macroprudential target is the sovereign–bank nexus rather than aggregate public debt.

Fiscal policy is often one of the economic Achilles heels of emerging markets. Therefore, adequately modeling it becomes crucial to understanding the effects of shocks impacting this class of economies. This paper seeks to make a new proposal on how to model an emerging market such as Brazil, with a particular emphasis on the fiscal side. To that end, we build a medium-scale open-economy DSGE model, enriched with a detailed government structure and a comprehensive array of fiscal tools. We then compare the effects of some relevant shocks to those generated by the Central Bank of Brazil’s DSGE workhorse model, SAMBA. Additionally, we analyze several fiscal structural reforms that have been suggested or implemented within the last decade. Our results show that our model does a good job of reproducing the movements of key economic variables, shedding light on the fiscal dynamics and their interactions with monetary policy and external shocks. Introducing Stone–Geary (subsistence) preferences for non-Ricardian households strengthens empirical realism without altering our main conclusions.