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This article studies the role of endogenous markups in the transmission of volatility shocks in real models. I design a variant of a small open economy model with volatility shocks and firm dynamics that gives rise to endogenous markups. I calibrate this model to match the business cycle facts in emerging economies and show that the impact of volatility shocks is substantially amplified if markups are endogenously time varying. Volatility shocks increase savings, due to precautionary motives, and markups, which act as a wedge that endogenously decreases real wages and labor supply with further negative aggregate dynamics that are absent in the models with constant markups.

We examine the welfare effects of bailouts in economies exposed to sovereign default risk. When a government of a small open economy requests a bailout from an international financial institution, it receives a non-defaultable loan of size G that comes with imposed debt limits. The government endogenously asks for the bailout during recessions and repays it when the economy recovers. Hence, the bailout acts as an imperfect state contingent asset that makes the economy better off. The bailout duration is endogenous and increases with its size. The bailout size creates non-trivial tradeoffs between receiving a larger amount of relatively cheap resources precisely in times of need on the one hand, and facing longer-lasting financial constraints and accumulated interest payments, on the other hand. We characterize and quantify these tradeoffs and document that welfare gains of bailouts are hump-shaped in the size of bailout loans Hernán D. Seoane gratefully acknowledges financial support from the Fundación Ramón Areces and the Ministerio Economía y Competitividad (Spain), grants 2014-ECO2014-56676-C2-1-P , ECO2016-76818-C3-1-P , MDM 2014-0431 , and Comunidad de Madrid , MadEco-CM ( S2015/HUM-34 4 4 ).

The price of capital is a key determinant of the financial accelerator, a transmission mechanism of shocks generated through the capital accumulation process of entrepreneurs that borrow in credit markets with frictions. This paper shows that the procedure of approximating the price of old capital by the net-of-depreciation price of new capital, as used in many articles since Bernanke et al. (1999), has profound implications when the capital depreciation rate is positive. When accounting for the appropriate price of capital, the effects of the financial accelerator are even stronger than originally assessed. (C) 2016 Elsevier B.V. All rights reserved. Hernán Seoane gratefully acknowledges support from Ministerio de Economía y Competitividad (Spain), grants ECO2014-56676-C2-1-P, MDM 2014-0431, and Comunidad de Madrid, MadEco-CM (S2015/HUM-3444).

Sudden Stops are characterized by large output drops, current account reversals and real exchange rate depreci-ation followed by a slow recovery, a pattern that has proven to be hard to capture with standard open economymodels. This paper extends the standard models with endogenous collateral constraints to include permanentincome (trend) shocks and studies the optimal policy design in this setting. Wefind that shocks to the trendplay an important role in generating a Sudden Stop followed by a slow recovery, a result that is also supportedby the data. With trend and transitory shocks, optimal capital control policy is procyclical, although less sothan under transitory shocks only. We gratefully acknowledge financial support from MDM 2014-0431, and Comunidad de Madrid, MadEco-CM (S2015/HUM-3444). Seoane gratefully acknowledges financial support from, Ministerio de Ciencia, Innovacion y Universidades (Spain) grant IJCI-2015-24465, "Programa propio de investigación" (PPI-2016-A-54) from Universidad Carlos III de Madrid, and the Ministerio Economía y Competitividad (Spain), grant ECO2016-76818-C3-1-P and ECO2014-56676-C2-1-P. Yurdagul gratefully acknowledges financial support from Ministerio Economía y Competitividad (Spain), grant ECO2015-68615-P., and from the Ministerio de Ciencia, Innovacion y Universidades (FJCI-2016-28864).

This paper reviews the baseline framework for the analysis of emerging economies. Using Argentinean data, I estimate a small open economy model with stochastic trend, working capital constraint and augmented with time-varying parameters. I find that "structural" technological and financial parameters of one-sector model are time-varying during 1936-2006. Time-varying parameters correlate with the real exchange rate, suggesting potential misspecification of the one-sector model. Therefore, I propose a two-sector model that endogenously accounts for the real exchange rate. In this model, stationary productivity shocks and the country premium together explain a large share of the variability observed in the data. (C) 2015 Elsevier B.V. All rights reserved.

The marginal utility of wealth in incomplete markets small open economy models follows a unit root process. I study the nonlinear properties of devices often used to remove the unit root and I find that they generate different dynamics when matching emerging markets. Models with endogenous discount factors reinforce consumption response to shocks and increase the countercyclicality of the trade balance to output ratio. Conversely, models with debt frictions ameliorate the responses of consumption and trade balance. Hence, to generate dynamics similar to those in emerging economies, the debt frictions need to be small, inducing a near unit root behavior in their Euler equations. This difference across models is hidden when matching developed economies because of consumption smoothing and the mild countercyclicality of the trade balance.