Heterogeneous borrowers in quantitative models of sovereign default
By: Juan Carlos Hatchondo, Leonardo Martinez, Horacio Sapriza
Contributors: Martinez, Leonardo (Economist); Sapriza, Horacio, 1974-; Federal Reserve Bank of Richmond
Series: Working paper -- no. 07-1; Working paper (Federal Reserve Bank of Richmond : Online) -- no. 07-1.
Publisher: Federal Reserve Bank of Richmond
Published: 2006
Place of publication: Richmond, Va.]
Language: eng
Format: [electronic resource]  /
Description: "We study an economy in which policymakers of different types (patient vs. impatient) alternate in power. Our framework builds on the model used in recent quantitative studies of sovereign default. We show that a default episode may be triggered by a change in the type in office, from a patient to an impatient policymaker. We also show that for this mechanism to be observed in equilibrium, it is necessary that there is enough political stability and that patient policymakers encounter sufficiently poor economic conditions during their tenure. Under high political stability, the presence of political turnover enables the model to generate: (i) a higher and more volatile spread (even when we focus on samples where only the patient type is in office), (ii) lower borrowing levels after a default episode, and (iii) a weaker correlation between economic conditions and default decisions. These results narrow the gap between the predictions of the model and the data."--Federal Reserve Bank of Richmond web site.
Notes: Title from PDF file as viewed on July 23, 2007

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