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Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets

  • Gabriel Cuadra
  • Horacio Sapriza

Emerging economies tend to experience larger political uncertainty and more default episodes than developed countries. This paper studies the effect of political uncertainty on sovereign default and interest rate spreads in emerging markets. The paper develops a quantitative model of sovereign debt and default under political uncertainty in a small open economy. Consistent with empirical evidence, the quantitative analysis shows that higher levels of political uncertainty significantly raise the default frequency and both the level and volatility of the spreads. When parties borrow from international credit markets, the presence of political uncertainty induces a short-sight behavior in politicians.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BE980C9ED-5AE9-D722-1D7E-7A12E99E2501%7D.pdf
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Paper provided by Banco de México in its series Working Papers with number 2006-02.

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Date of creation: Feb 2006
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Handle: RePEc:bdm:wpaper:2006-02
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