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Growth Regimes, Endogenous Elections, and Sovereign Default Risk

Author

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  • Burcu Eyigungor

    (Federal Reserve Bank of Philadelphia)

  • Satyajit Chatterjee

    (Federal Reserve Bank of Philadelphia)

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.

Suggested Citation

  • Burcu Eyigungor & Satyajit Chatterjee, 2016. "Growth Regimes, Endogenous Elections, and Sovereign Default Risk," 2016 Meeting Papers 1058, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1058
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    References listed on IDEAS

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