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Sovereign default risk with heterogenous borrowers

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  • Juan Carlos Hatchondo
  • Leonardo Martinez
  • Horacio Sapriza

Abstract

We study a standard quantitative model of sovereign default in which the government in a small open economy (SMO) decides how much to save and whether to default on its debt. In contrast with previous quantitative studies, we do not assume that a defaulting country is exogenously excluded from capital markets, and we assume that political parties with different discount factors alternate in power. Preliminary quantitative results indicate that even without assuming exogenous exclusion, after a default episode, the model generates difficulties in market access---in average, for the same level of debt, spreads are higher after default; due to this increase in borrowing costs, capital inflows are initially decreased, and recover slowly after that. We also describe the strategic interaction of governments with different patience

Suggested Citation

  • Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2006. "Sovereign default risk with heterogenous borrowers," 2006 Meeting Papers 845, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:845
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    References listed on IDEAS

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    1. Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, vol. 83(2), pages 243-254, March.
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    More about this item

    Keywords

    Sovereign Default; Strategic Behavior; Endogenous Borrowing Constraints; Markov Perfect Equilibrium.;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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