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Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets

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  • Cuadra Gabriel
  • Sapriza Horacio

Abstract

Emerging economies tend to experience larger political uncertainty and more default episodes than developed countries. This paper studies the effect of political uncertainty on sovereign default and interest rate spreads in emerging markets. The paper develops a quantitative model of sovereign debt and default under political uncertainty in a small open economy that captures some of the main empirical regularities in emerging economies: default occurs in equilibrium and interest rate spreads and default risk are countercyclical. Consistent with empirical evidence, the quantitative analysis shows that higher levels of political uncertainty significantly raise the default frequency and both the level and volatility of the spreads.

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  • Cuadra Gabriel & Sapriza Horacio, 2006. "Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets," Working Papers 2006-02, Banco de México.
    • Handle: RePEc:bdm:wpaper:2006-02
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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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