Endogenous Political Turnover and Fluctuations in Sovereign Default Risk

Satyajit Chatterjee () and Burcu Eyigungor

No 17-1, Working Papers from Federal Reserve Bank of Philadelphia

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.

Keywords: growth regimes; elections; sovereign default risk (search for similar items in EconPapers)
Pages: 41 pages
Date: 2017-01-10
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Endogenous political turnover and fluctuations in sovereign default risk (2019)
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