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The political economy of sovereign defaults

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  • Andreasen, Eugenia
  • Sandleris, Guido
  • Van der Ghote, Alejandro

Abstract

How do income distribution and the tax system affect sovereign borrowing and default decisions? Are these effects shaped by the political constraints that governments face when raising revenues to repay the debt? To address these questions, we incorporate agent heterogeneity, in terms of income distribution and tax burden, and a political support constraint into a standard DSGE model of sovereign default. The results show that income inequality and regressive taxes make defaults more likely for a given level of debt while they reduce sovereign borrowing in equilibrium. Tighter political support requirements reinforce these effects.

Suggested Citation

  • Andreasen, Eugenia & Sandleris, Guido & Van der Ghote, Alejandro, 2019. "The political economy of sovereign defaults," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 23-36.
    • Handle: RePEc:eee:moneco:v:104:y:2019:i:c:p:23-36
    DOI: 10.1016/j.jmoneco.2018.09.003
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Can DSGE models describe political cohesion?
      by Jason Rave in Macro Matters on 2012-05-29 02:41:00

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    Cited by:

    1. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    2. Christoph Trebesch, 2019. "Resolving sovereign debt crises: the role of political risk," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 421-444.
    3. Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Distributional Incentives In An Equilibrium Model Of Domestic Sovereign Default," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 7-44, February.
    4. Farzana Alamgir & Alok Johri, 2022. "International Sovereign Spread Differences and the Poverty of Nations," Department of Economics Working Papers 2022-06, McMaster University.
    5. Antonio Cusato Novelli, 2021. "Sovereign default, political instability and political fragmentation," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 732-755, September.
    6. D’Erasmo, Pablo & Mendoza, Enrique G., 2021. "History remembered: Optimal sovereign default on domestic and external debt," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 969-989.
    7. Gonçalves, Carlos Eduardo & Guimaraes, Bernardo, 2015. "Sovereign default risk and commitment for fiscal adjustment," Journal of International Economics, Elsevier, vol. 95(1), pages 68-82.
    8. repec:idb:brikps:82321 is not listed on IDEAS
    9. Thomas Philippon & Francisco Roldán, 2018. "On the Optimal Speed of Sovereign Deleveraging with Precautionary Savings," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(2), pages 375-413, June.
    10. Scholl, Almuth, 2017. "The dynamics of sovereign default risk and political turnover," Journal of International Economics, Elsevier, vol. 108(C), pages 37-53.
    11. Guido Sandleris, 2016. "The Costs of Sovereign Default: Theory and Empirical Evidence," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 1-27, April.
    12. Maren Froemel, 2014. "Imperfect Financial Markets and the Cyclicality of Social Spending," Working Paper Series of the Department of Economics, University of Konstanz 2014-11, Department of Economics, University of Konstanz.
    13. Pablo D'Erasmo & Enrique Mendoza, 2011. "Optimal Domestic (and External) Sovereign Default," PIER Working Paper Archive 16-019, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 04 Aug 2016.
    14. Steenkamp, Daan & Havemann, Roy & Hollander, Hylton, 2022. "The macroeconomics of establishing a basic income grant in South Africa," MPRA Paper 114614, University Library of Munich, Germany.
    15. Carlo de Bassa & Edoardo Grillo & Francesco Passarelli, 2021. "Sanctions and incentives to repudiate external debt," Journal of Theoretical Politics, , vol. 33(2), pages 198-224, April.
    16. Minjie Deng, 2021. "Inequality, Taxation, and Sovereign Default Risk," Discussion Papers dp21-15, Department of Economics, Simon Fraser University.
    17. Bernardo Guimaraes & Lucas Tumkus, 2020. "On the costs of sovereign default in quantitative models," Discussion Papers 2021, Centre for Macroeconomics (CFM).
    18. Farah-Yacoub,Juan P. & Graf Von Luckner,Clemens Mathis Henrik & Ramalho,Rita & Reinhart,Carmen M., 2022. "The Social Costs of Sovereign Default," Policy Research Working Paper Series 10157, The World Bank.
    19. Mr. Andrea F Presbitero & Mr. Dhaneshwar Ghura & Mr. Olumuyiwa S Adedeji & Lamin Njie, 2015. "International Sovereign Bonds by Emerging Markets and Developing Economies: Drivers of Issuance and Spreads," IMF Working Papers 2015/275, International Monetary Fund.

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    More about this item

    Keywords

    Sovereign default; Fiscal policy; Inequality; Political economy;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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