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Foreign Debt and the Ricardian Equivalence

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  • Eric Mengus

    (Toulouse School of Economics)

Abstract

This paper shows that Bulow and Rogoff's "no sovereign lending" result does not apply in non-Ricardian economies. When a government strictly prefers debt-based to tax-based funding, an endogenous cost arises, prompting the government to repay. More accurately, a government which does not have enough tools to reach the first best (in which the Ricardian equivalence holds), cannot afford to redistribute the gains from default, and therefore net losses to agents will emerge in the economy. Finally, when foreign debt levels are small, the gains of default do not balance these losses.

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File URL: http://www.economicdynamics.org/meetpapers/2012/paper_412.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 412.

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Date of creation: 2012
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Handle: RePEc:red:sed012:412

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  1. Alexander Guembel & Oren Sussman, 2009. "Sovereign Debt without Default Penalties," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1297-1320.
  2. Stefania Albanesi & Roc Armenter, 2012. "Intertemporal Distortions in the Second Best," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1271-1307.
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  10. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
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  13. Oren Sussman & Alexander Guembel, 2005. "Sovereign Debt Without Default Penalties," OFRC Working Papers Series 2005fe17, Oxford Financial Research Centre.
  14. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  15. Cole, Harold L. & Kehoe, Patrick J., 1995. "The role of institutions in reputation models of sovereign debt," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 45-64, February.
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  18. Mengus, E., 2014. "Honoring Sovereign Debt or Bailing Out Domestic Residents: A Theory of Internal Costs of Default," Working papers 480, Banque de France.
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