Hi!

I’m working to a model with endogenous (sovereign) default probability in a soe.

The problem I am facing is that I don’t know how to write in Dynare the binary variable that triggers the default. The set-up is as follows:

- The probability of default depends on the debt level of the government. Let’s call this probability P.
- The probability is drawn from a known distribution (for instance a beta distribution).
- The parameters of the distributions depend (of course) on the level of debt.

Up to here everything is ok. Here it comes the tricky part:

- When the government defaults, it does so on the entire debt.
- Let’s call DELTA the BINARY variable of the government to decide whether to deafult or not.
- The government defaults with probability P. It doesn’t deafult with probability (1-P).

The point is, how can I write the variable DELTA in Dynare?

Does it allow for endogenous (or even exogenous) binary variables?

Thank you very much!

Ciao,

RT