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Sovereign Defaults and Public Investment (Capital)

Author

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  • Tamon Asonuma

    (International Monetary Fund)

  • Hyungseok Joo

    (University of Surrey)

Abstract

Sovereigns' public investment (capital) influences sovereign debt crises and resolution. We compile a dataset on public expenditure composition in 1975{2020 for 75 countries. We show that during sovereign debt restructurings with private external creditors, public investment (i) experiences a severe decline and a slow recovery, (ii) differs from public consumption and transfers, and (iii) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows public investment dynamics delay debt settlement (i.e., \capital accumulation delays"). Data support theoretical predictions.

Suggested Citation

  • Tamon Asonuma & Hyungseok Joo, 2023. "Sovereign Defaults and Public Investment (Capital)," School of Economics Discussion Papers 1123, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:1123
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    References listed on IDEAS

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    1. 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.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    4. Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," European Economic Review, Elsevier, vol. 92(C), pages 416-432.
    5. Rohan Pitchford & Mark L. J. Wright, 2012. "Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 812-837.
    6. Mr. Tamon Asonuma, 2016. "Serial Sovereign Defaults and Debt Restructurings," IMF Working Papers 2016/066, International Monetary Fund.
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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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