Growth Regimes, Endogenous Elections, and Sovereign Default Risk

Burcu Eyigungor and Satyajit Chatterjee ()
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Burcu Eyigungor: Federal Reserve Bank of Philadelphia

No 1058, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: A model in which the sovereign derives private benefits from public office and contests elections to stay in power is developed. The possibility of turnover (and loss of private benefits) makes the sovereign behave myopically. Consistent with evidence, the sovereign is reelected if economic growth is strong. Combined with an estimated Markov switching growth process, the model explains the average debt-to-GDP ratio, the average sovereign spreads and a large fraction of the standard deviation of spreads for three emerging economies. Existing explanations of these facts rely on very low discount factors and default costs that are asymmetric with respect to output, assumptions that are not made in this study.

Date: 2016
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1058

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