Endogenous Political Turnover and Fluctuations in Sovereign Default Risk

41 Pages Posted: 11 Jan 2017

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Burcu Eyigungor

Federal Reserve Bank of Philadelphia

Date Written: 2017-01-10

Abstract

A sovereign default model in which the sovereign derives private benefits from public office and contests elections to stay in power is developed. The economy’s growth process is modeled as a Markov switching regime, which is shown to be a better description of the data for our set of emerging economies. In the model, consistent with evidence, the sovereign is less likely to be reelected if economic growth is weak. In the low-growth regime, there is higher probability of loss of private benefits due to turnover, which makes the sovereign behave more myopically. This growth-linked variation in effective discount factor is shown to be important in generating volatility in sovereign spreads.

Keywords: growth regimes, elections, sovereign default risk

Suggested Citation

Chatterjee, Satyajit and Eyigungor, Burcu, Endogenous Political Turnover and Fluctuations in Sovereign Default Risk (2017-01-10). FRB of Philadelphia Working Paper No. 17-1. Available at SSRN: https://ssrn.com/abstract=2897411

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)

HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

Burcu Eyigungor

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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