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Without loss of generality, ω0 is assumed to be zero.
We use gross national income rather than GDP because the former, which captures net factor income and current transfers, as a better measure of the ability of a country to pay is often considered a more appropriate measure of a country’s solvency.
The regional spread (excluding a country) is calculated as the weighted average of all other countries in the same region for the same year. The weight used was total EMBI market value (MV). E.g., the regional spread (RS) excluding country i in year t:
An alternative data source for spreads is the EMBI+ index, which covers 19 countries. We chose the EMBI Global because it covers more countries and has more observations than the EMBI+.
Higher values for Freedom House indices means less freedom. Their ratings for the civil liberty and political rights measures ranges from 1 to 7, with 7 representing the least political rights and civil liberties.
This number is obtained by adding the values of the coefficients estimates of debt to GNI and current expenditure to GDP.
Not all sensitivity results are reported, but they can be obtained upon request.