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Government Debt and Default in a Minimal State

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  • Ludwig, Maximilian

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    (Department of Economics, Hamburg University)

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    Abstract

    I construct a model of a small open economy in which government spending is necessary to mitigate transaction cost. This provides a simple raison d’etre for a government and generates features many sovereign default models do not have: taxes and government spending. Even though the government sector is relatively small, the model can generate average and peak levels of government debt as well as second moments in line with business cycle statistics of Argentina. The model is solved using an algorithm that works roughly similar to earlier works in this literature, but avoids their issues with erroneous approximations.

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    File URL: http://siupt.uportu.pt/content/files/dcee/Investigacao/WP_30_2013.pdf
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    Bibliographic Info

    Paper provided by Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE) in its series Working Papers with number 30/2013.

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    Length: 31 pages
    Date of creation: 05 Jul 2013
    Date of revision:
    Handle: RePEc:ris:cigewp:2013_030

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    Postal: Universidade Portucalense – Economics and Management Department (CIGE – Centro de Investigação em Gestão e Economia), Rua Dr. António Bernardino de Almeida, 541-619, 4200 – 072 Porto, Portugal
    Web page: http://www.uportu.pt/site-scripts/centro_pagina.asp?codmenu=71&codcentro=24
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    Keywords: Sovereign Default; Government Spending; Interest Rates;

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    1. Jeremy I. Bulow & Kenneth Rogoff, 1988. "Sovereign Debt: Is To Forgive To Forget?," NBER Working Papers 2623, National Bureau of Economic Research, Inc.
    2. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
    3. Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business cycles in emerging economies: the role of interest rates," Staff Report 335, Federal Reserve Bank of Minneapolis.
    4. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates and the current account," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    5. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2008. "Heterogeneous borrowers in quantitative models of sovereign default," Working Paper 07-01, Federal Reserve Bank of Richmond.
    6. Vivian Z. Yue & Enrique G. Mendoza, 2011. "A General Equilibrium Model of Sovereign Default and Business Cycles," IMF Working Papers 11/166, International Monetary Fund.
    7. Gabriel Cuadra & Horacio Sapriza, 2006. "Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets," Working Papers 2006-02, Banco de México.
    8. Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers 640, Yale - Economic Growth Center.
    9. 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.
    10. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
    11. Sandra Lizarazo, 2009. "Contagion of Financial Crises in Sovereing Debt Markets," Working Papers 0906, Centro de Investigacion Economica, ITAM.
    12. Leonardo Martinez & Horacio Sapriza & Juan Carlos Hatchondo, 2010. "Quantitative Properties of Sovereign Default Models," IMF Working Papers 10/100, International Monetary Fund.
    13. Bohn, Henning, 2007. "Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1837-1847, October.
    14. David Benjamin & Mark L. J. Wright, 2009. "Recovery Before Redemption: A Theory Of Delays In Sovereign Debt Renegotiations," CAMA Working Papers 2009-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    15. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
    16. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Quantitative properties of sovereign default models: solution methods matter," Working Paper 10-04, Federal Reserve Bank of Richmond.
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