Articlegreen2009

HETEROGENEOUS BORROWERS IN QUANTITATIVE MODELS OF SOVEREIGN DEFAULT*

125 citations0/0 files storedInternational Economic Review

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Global Financial Crisis and Policies Fiscal Policies and Political Economy Credit Risk and Financial Regulations

Abstract

We extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to alternate in power. We show that a default episode may be triggered by a change in the type of policymaker in office, and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions. Under high political stability, political turnover enables the model to generate a weaker correlation between economic conditions and default decisions, a higher and more volatile spread, and lower borrowing levels after a default episode.

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References

1999The Twin Crises: The Causes of Banking and Balance-of-Payments Problems 1981Debt with Potential Repudiation: Theoretical and Empirical Analysis 2002Closing Small Open Economy Models 2007Emerging Market Business Cycles: The Cycle Is the Trend 2005Business cycles in emerging economies: the role of interest rates 2007Default Risk and Income Fluctuations in Emerging Economies 2007Liquidity and Expected Returns: Lessons from Emerging Markets 2005Defaultable debt, interest rates and the current account

Cited by

2009Fiscal policy and default risk in emerging markets 2016Debt Dilution and Sovereign Default Risk 2014Sovereign Debt 2010Quantitative properties of sovereign default models: Solution methods matter 2008Government Reputation and Debt Repayment in Emerging Economies 2016What is a Sustainable Public Debt?2015A quantitative model of sovereign debt, bailouts and conditionality

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