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News and sovereign default risk in small open economies

Bora Durdu, C, Praca Cavaco Nunes, Ricardo and Sapriza, H (2013) News and sovereign default risk in small open economies Journal of International Economics, 91 (1). pp. 1-17.

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This paper builds a unified model of sovereign debt, default risk, and news shocks. News shocks improve the quantitative performance of the sovereign default model in a number of empirically-relevant dimensions. First, with news shocks, not all defaults occur during downturns. Second, the news shocks help account for key differences between developing and more developed economies: as the precision of news improves, the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt in line with more developed economies. Third, the model captures the hump-shaped relationship between default rates and the precision of news obtained from the data. Finally, the news shocks have a nonmonotonic effect on welfare.

Item Type: Article
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
Bora Durdu, C
Praca Cavaco Nunes,
Sapriza, H
Date : September 2013
DOI : 10.1016/j.jinteco.2013.04.002
Copyright Disclaimer : Copyright 2013 Elsevier. All rights reserved.
Uncontrolled Keywords : Sovereign default riskNews shocksEndogenous borrowing constraints
Depositing User : Melanie Hughes
Date Deposited : 10 Oct 2017 16:49
Last Modified : 16 Jan 2019 18:57

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