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A Model of Sovereign Debt in Democracies

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  • Ali Alichi
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    Abstract

    This paper develops and empirically tests a political economy model of sovereign debt. The main incentive for repaying sovereign debt is to maintain access to international capital markets. However, in a democracy, one generation may choose default regardless of its consequences for future generations. An old generation with little concern for its country''s access to capital markets can force a default on debt if it has the majority of voters. On the other hand, if the younger generation is more numerous, it can force repayment of previously defaulted debt. Other voter heterogeneities, such as in income, can generate similar results.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/152.

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    Length: 34
    Date of creation: 01 Jun 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/152

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    Related research

    Keywords: Sovereign debt; Economic models; Data analysis; capital markets; international capital markets; international capital; external debt; access to international capital; access to international capital markets; risk aversion; debt crises; international debt; foreign debt; debt default; external liabilities; domestic debt; access to capital markets; debt outstanding; debtor country; total external debt; access to funds; sovereign debtor; debt defaults; credit rating; sovereign defaults; currency crises; stabilization policies; international loans;

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    1. Cole, Harold L & Kehoe, Timothy J, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 91-116, January.
    2. Jeremy I. Bulow & Kenneth Rogoff, 1988. "Sovereign Debt: Is To Forgive To Forget?," NBER Working Papers 2623, National Bureau of Economic Research, Inc.
    3. Kenneth Rogoff, 1987. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
    4. Rose, Andrew K, 2002. "One Reason Countries Pay Their Debts: Renegotiation and International Trade," CEPR Discussion Papers 3157, C.E.P.R. Discussion Papers.
    5. Ray C. Fair, 1976. "The Effects of Economic Events on Votes for President," Cowles Foundation Discussion Papers 418, Cowles Foundation for Research in Economics, Yale University.
    6. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
    7. Joseph G. Altonji & Fumio Hayashi & Laurence Kotlikoff, . "Parental Altruism and Inter Vivos Transfers: Theory and Evidence," IPR working papers 95-22, Institute for Policy Resarch at Northwestern University.
    8. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
    9. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
    10. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Why democracies (often) do better
      by Noah in Noahpinion on 2010-01-29 14:05:00
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    Cited by:
    1. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.

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