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Sovereign default, interest rates and political uncertainty in emerging markets

  • Cuadra, Gabriel
  • Sapriza, Horacio

A large body of the empirical literature shows that high turnover rates/length of tenure of policymakers and the degree of conflict within a country affects sovereign spreads, debt and default rates. We help to rationalize such claims by including these political features in a dynamic stochastic small open economy model of sovereign debt and default. In this way we offer a complementary approach to the econometric analyses in the literature. Consistent with the data, the quantitative analysis shows that politically unstable and more polarized economies experience higher default rates and larger level and volatility of sovereign interest rate spreads.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 76 (2008)
Issue (Month): 1 (September)
Pages: 78-88

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Handle: RePEc:eee:inecon:v:76:y:2008:i:1:p:78-88
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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