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  3. American Economic Review
  4. May 2012
  5. Estimating Sovereign Default Risk

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Estimating Sovereign Default Risk

  • Huixin Bi
  • Nora Traum
American Economic Review
vol. 102, no. 3, May 2012
(pp. 161–66)
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Abstract

This paper uses Bayesian methods to estimate the sovereign default probability for Greece and Italy in the post-EMU period. We build a real business cycle model that allows for interactions among fiscal policy instruments, sovereign default risk, and a "fiscal limit," which measures the maximum level of debt the government is willing to finance. We estimate the full nonlinear model using likelihood inference methods. Although we find that Greece historically had a lower default probability than Italy for a given debt level, our estimates suggest that the Italian government is more willing to service debt than the Greek government.

Citation

Bi, Huixin, and Nora Traum. 2012. "Estimating Sovereign Default Risk." American Economic Review, 102 (3): 161–66. DOI: 10.1257/aer.102.3.161

JEL Classification

  • H63 National Debt; Debt Management; Sovereign Debt
  • E13 General Aggregative Models: Neoclassical
  • G01 Financial Crises