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What determines debt intolerance? The role of political and monetary institutions

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  • Raffaela Giordano

    ()
    (Bank of Italy, Structural Economic Analysis Department)

  • Pietro Tommasino

    ()
    (Bank of Italy, Structural Economic Analysis Department)

Abstract

Why do some states default on their debt more often than others? We argue that sovereign default is the outcome of a political struggle among different groups of citizens. It is more likely to happen if: (i) domestic debt-holders are relatively weak; (ii) the the political costs of the financial turmoil typically triggered by a sovereign bankrupcy are small. We show that these conditions are in turn more likely to be present if a country lacks a well-developed financial system and/or a sufficiently independent central bank.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 700.

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Date of creation: Jan 2009
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Handle: RePEc:bdi:wptemi:td_700_09

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Keywords: fiscal sustainability; political economy; bank runs; central bank independance; financial development.;

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Cited by:
  1. Athanasios Tagkalakis, 2012. "The effects of financial crisis on fiscal positions," Working Papers 145, Bank of Greece.
  2. Marco Committeri & Francesco Spadafora, 2013. "You never give me your money? Sovereign debt crises, collective action problems, and IMF lending," Questioni di Economia e Finanza (Occasional Papers) 143, Bank of Italy, Economic Research and International Relations Area.

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