Interest rate uncertainty and sovereign default risk

Empirical studies suggest that fluctuations in the level and volatility of world interest rate affect sovereign spreads emerging economies. We incorporate an estimated time-varying process for (with both shocks) into a model default calibrated to panel Time variation interacts with incentives leads state contingent effects similar empirical literature. On average, response rise delivers 1.4 times increase spread. The has major impact on this average – is much larger high states. Moreover, we show can generate considerable co-movement yields across nations, as seen data.