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Endogenous Political Turnover and Fluctuations in Sovereign Default Risk

Author

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  • Satyajit Chatterjee

    (National Bureau of Economic Research
    Federal Reserve Bank of Philadelphia
    Federal Reserve Bank)

  • Burcu Eyigungor

Abstract

A sovereign default model in which the sovereign derives private benefits from public office and contests elections to stay in power is developed. The economy?s growth process is modeled as a Markov switching regime, which is shown to be a better description of the data for our set of emerging economies. In the model, consistent with evidence, the sovereign is less likely to be reelected if economic growth is weak. In the low-growth regime, there is higher probability of loss of private benefits due to turnover, which makes the sovereign behave more myopically. This growth-linked variation in effective discount factor is shown to be important in generating volatility in sovereign spreads.

Suggested Citation

  • Satyajit Chatterjee & Burcu Eyigungor, 2017. "Endogenous Political Turnover and Fluctuations in Sovereign Default Risk," Working Papers 17-1, Federal Reserve Bank of Philadelphia, revised 10 Jan 2017.
  • Handle: RePEc:fip:fedpwp:17-1
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    References listed on IDEAS

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    Cited by:

    1. Jeon, Kiyoung & Kabukcuoglu, Zeynep, 2018. "Income inequality and sovereign default," Journal of Economic Dynamics and Control, Elsevier, vol. 95(C), pages 211-232.
    2. Christoph Trebesch, 2018. "Resolving Sovereign Debt Crises: The Role of Political Risk," CESifo Working Paper Series 7161, CESifo Group Munich.

    More about this item

    Keywords

    elections; sovereign default risk; growth regimes;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy

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