The Dynamics of Sovereign Default Risk and Political Turnover

Almuth Scholl

No 2015-05, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: This paper develops a stochastic dynamic politico-economic model of sovereign debt to analyze the interaction of sovereign default risk and political turnover. Two parties differ in their preferred size of public spending which is financed by taxes and external debt. Electoral outcomes are characterized by tradeoffs between the economic benefits from the incumbent's policies against idiosyncratic ideological aspects. Quantitative simulations replicate the typical empirical facts of emerging markets. Endogenous political turnovers increase the parties' discrepancies between debt and default policies. Debt crises are associated with adverse economic shocks and trigger political turnovers. Political turnovers generate defaults even without negative shocks.

Keywords: sovereign debt; default risk; political turnover; fiscal policy (search for similar items in EconPapers)
JEL-codes: D72 E62 F34 F41 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2015-02-25
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The dynamics of sovereign default risk and political turnover (2017)
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