News And Sovereign Default Risk In Small Open Economies

Authors: Ceyhun Bora Durdu
ISBN-10: 1437939147
ISBN-13: 9781437939149
Keywords: open, economies, small, risk, sovereign, default, news
Formats: Read Online And/Or Other Formats
Copyrights: General Copyright
Publisher: DIANE Publishing
Published Time: DIANE Publishing
Pages: 24
This paper builds a model of sovereign debt in which default risk, interest rates, and debt depend not only on current fundamentals but also on news about future fundamentals. News shocks (NS) affect equilibrium outcomes because they contain info. about the future ability of the gov?t. to repay its debt. First, in the model with NS not all defaults occur in bad times. Second, the NS help account for key differences between emerging markets and developed economies: as the precision of the news improves the model predicts lower variability of consumption, less counter-cyclical trade balance and interest rate spreads. Finally, the model also captures the hump-shaped relationship between default rates and the precision of news obtained from the data.

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