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The Political Economy of Sovereign Defaults

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  • Eugenia Andreasen
  • Guido Sandleris
  • Alejandro Van Der Ghote

Abstract

In times of crises, sovereign debt repayment typically depends on the implementation of fiscal programs. In order to implement these programs, governments usually need to garner some political support. The literature of sovereign defaults has not paid attention to the presence of political constraints, assuming instead, that governments have always unlimited access to the resources of the economy to repay their debts. In this paper, we analyze how the presence of political constraints affects sovereign governments� borrowing and default decisions. We do so in a standard DSGE model with endogeneous default risk where we introduce two novel features: heterogeneous agents in the domestic private sector and a requirement that the government obtains some of their support to implement a fiscal program needed to repay the debt. In this framework, we show that there can be different types of sovereign default events. Default can arise because the government is unwilling to repay, in the best tradition of the sovereign debt literature, but also due to insufficient political support even if a benevolent government would prefer to repay.We calibrate the model to the Argentine economy and show that, once political constraints are taken into account, the matching with the data of standard sovereign debt models is weaker than previously understood.

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Bibliographic Info

Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number 2011-07.

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Length: 24 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:udt:wpbsdt:2011-07

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  1. Can DSGE models describe political cohesion?
    by Jason Rave in Macro Matters on 2012-05-28 21:41:00
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Cited by:
  1. Guido Sandleris, 2012. "The Costs of Sovereign Defaults:Theory and Empirical Evidence," Business School Working Papers 2012-02, Universidad Torcuato Di Tella.

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