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HETEROGENEOUS BORROWERS IN QUANTITATIVE MODELS OF SOVEREIGN DEFAULT

Juan Hatchondo, Leonardo Martinez and Horacio Sapriza

International Economic Review, 2009, vol. 50, issue 4, 1129-1151

Abstract: We extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to stochastically 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. Copyright © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2009
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