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Heterogeneous borrowers in quantitative models of sovereign default

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  • Juan Carlos Hatchondo
  • Leonardo Martinez
  • Horacio Sapriza

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.

Suggested Citation

  • Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2008. "Heterogeneous borrowers in quantitative models of sovereign default," Working Paper 07-01, Federal Reserve Bank of Richmond, revised 2008.
  • Handle: RePEc:fip:fedrwp:07-01
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lizarazo, Sandra, 2009. "Contagion of Financial Crises in Sovereign Debt Markets," MPRA Paper 20795, University Library of Munich, Germany, revised 06 Feb 2010.
    2. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond, revised 2012.
    3. Boz, Emine, 2011. "Sovereign default, private sector creditors, and the IFIs," Journal of International Economics, Elsevier, vol. 83(1), pages 70-82, January.
    4. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
    5. Gabriel Cuadra & Juan Sanchez & Horacio Sapriza, 2010. "Fiscal Policy and Default Risk in Emerging Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 452-469, April.
    6. Sandra Lizarazo & Jose Maria Da-Rocha, 2009. "Money, Credit and Default," Working Papers 0908, Centro de Investigacion Economica, ITAM.
    7. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2009. "On the cyclicality of the interest rate in emerging economy models: solution methods matter," Working Paper 09-13, Federal Reserve Bank of Richmond, revised 2009.
    8. Tamon Asonuma, 2010. "Serial Default and Debt Renegotiation," 2010 Meeting Papers 169, Society for Economic Dynamics.
    9. Qian, Rong, 2012. "Why do some countries default more often than others ? the role of institutions," Policy Research Working Paper Series 5993, The World Bank.
    10. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, vol. 79(1), pages 117-125, September.
    11. Markus Jorra, 2011. "The Heterogeneity of Default Costs: Evidence from Recent Sovereign Debt Crises," MAGKS Papers on Economics 201151, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    12. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2007. "The economics of sovereign defaults," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 93(Spr), pages 163-187.
    13. Nicolas Melissas, 2009. "On Bid Disclosure in OCS Wildcat Auctions," Working Papers 0905, Centro de Investigacion Economica, ITAM.
    14. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    15. Zhu, Junjun & Xie, Shiyu, 2011. "Asymmetric Shocks, Long-term Bonds and Sovereign Default," MPRA Paper 28236, University Library of Munich, Germany.

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