Sovereign default and macroeconomic tipping points

Mark Joy

No 10/RT/12, Research Technical Papers from Central Bank of Ireland

Abstract: This paper examines the impact of macroeconomic fundamentals on the probability of sovereign default and the probability of exit from default while allowing explicitly for model uncertainty. Model uncertainty is addressed by employing Bayesian model-averaging techniques, averaging over a very large number of different empirical models that each endeavour to explain entry to and exit from periods of sovereign default for defaulting countries over the period 1975 to 2010. Default probabilities are estimated and then used to price sovereign bond spreads. Key findings are: (i) large budget deficits and high interest payments on external debt represent key macroeconomic tipping points for sovereign default; (ii) for exiting periods of default, reducing public debt matters most. These results are robust to both narrow and wide definitions of sovereign default and, due to use of model-averaging techniques, robust to model uncertainty.

Keywords: Sovereign default; risk; model uncertainty (search for similar items in EconPapers)
JEL-codes: E62 F34 G12 G13 G15 (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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