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Heterogeneous Borrowers In Quantitative Models Of Sovereign Default

  • Juan Carlos Hatchondo
  • Leonardo Martinez
  • Horacio Sapriza

We extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to stochastically 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. Copyright © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 50 (2009)
Issue (Month): 4 (November)
Pages: 1129-1151

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Handle: RePEc:ier:iecrev:v:50:y:2009:i:4:p:1129-1151
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