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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 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.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 07-01.

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Date of creation: 2008
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Handle: RePEc:fip:fedrwp:07-01
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