We thank two anonymous referees, our colleagues at the Federal Reserve Bank of Richmond, and seminar participants at the 2006 Midwest Theory Meetings, the 2006 Midwest Macroeconomics Meetings, the Institute for International Economic Studies at the University of Stockholm, the 2006 SED, the 2006 Federal Reserve System Meeting on International Economics, the 2006 Wegmans Conference, the 2007 North American Winter Meetings of the Econometric Society, the 2008 Federal Reserve System Macroeconomics Meeting, the Universidad Nacional de Tucumán, and the Pontificia Universidad Católica de Chile for comments and suggestions. In particular, we thank Cristina Arellano, Marina Azzimonti Renzo, and Martin Bodenstein for helpful discussions of this article. We also thank Elaine Mandaleris-Preddy for editorial support. All remaining mistakes are our own. The views expressed here in are those of the authors and should not be attributed to the IMF, its Executive Board, or its management, the Federal Reserve Bank of Richmond, or the Federal Reserve System. Please address correspondence to: Leonardo Martinez, IMF Institute, International Monetary Fund, 700 19th St. NW, Washington, DC 20431, U.S.A. E-mail: firstname.lastname@example.org.
HETEROGENEOUS BORROWERS IN QUANTITATIVE MODELS OF SOVEREIGN DEFAULT*
Article first published online: 26 OCT 2009
© (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
International Economic Review
Volume 50, Issue 4, pages 1129–1151, November 2009
How to Cite
Hatchondo, J. C., Martinez, L. and Sapriza, H. (2009), HETEROGENEOUS BORROWERS IN QUANTITATIVE MODELS OF SOVEREIGN DEFAULT. International Economic Review, 50: 1129–1151. doi: 10.1111/j.1468-2354.2009.00562.x
Manuscript received March 2007; revised February 2008.
- Issue published online: 26 OCT 2009
- Article first published online: 26 OCT 2009
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.