Abstract
Sovereign default models successfully explain business cycle in emerging economies by matching the stylized facts of main economic aggregates in normal and default periods but they usually fail to reproduce both the large levels of debt and spread observed in the data. We introduce political uncertainty in the standard default model of Arellano (2008): the incumbent has an exogenous probability of not being reelected in the next period, but in the cases when she decides to default, there is a larger probability of losing power. After estimation of the relevant parameters by targeting key business cycle moments, the model generates realistic levels of debt to GDP and spread without a ecting the performance on the other business cycle moments. The estimated political cost of default from the model is shown as being consistent with the decline in confidence in the Argentinian government documented around its 2001 default event.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
