News and sovereign default risk in small open economies

C. Bora Durdu, Ricardo Nunes and Horacio Sapriza

Journal of International Economics, 2013, vol. 91, issue 1, 1-17

Abstract: This paper builds a unified model of sovereign debt, default risk, and news shocks. News shocks improve the quantitative performance of the sovereign default model in a number of empirically-relevant dimensions. First, with news shocks, not all defaults occur during downturns. Second, the news shocks help account for key differences between developing and more developed economies: as the precision of news improves, the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt in line with more developed economies. Third, the model captures the hump-shaped relationship between default rates and the precision of news obtained from the data. Finally, the news shocks have a nonmonotonic effect on welfare.

Keywords: Sovereign default risk; News shocks; Endogenous borrowing constraints (search for similar items in EconPapers)
JEL-codes: E44 F34 F41 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (42)

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Related works:
Working Paper: News and Sovereign Default Risk in Small Open Economies (2013)
Working Paper: News and sovereign default risk in small open economies (2011)
Working Paper: News and sovereign default risk in small open economies (2010)
Working Paper: News and sovereign default risk in small open economies (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:91:y:2013:i:1:p:1-17

DOI: 10.1016/j.jinteco.2013.04.002

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