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The dynamics of sovereign default risk and political turnover

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  • Scholl, Almuth

Abstract

This paper develops a stochastic dynamic politico-economic model of sovereign debt to analyze the interaction of sovereign default risk and political turnover. Two parties differ in their preferred size of unproductive public spending which is financed by taxes and external debt. Electoral outcomes are characterized by the economic benefits from the incumbent's policies and stochastic idiosyncratic ideological aspects. Quantitative findings suggest that endogenous political turnover increases the discrepancies between the optimal borrowing and default policies of the two parties. Prior to a debt crisis, the incumbent government accumulates external debt to foster the probability of remaining in power. The dynamic interaction of electoral outcomes, external debt, and sovereign default supports arguments for imposing institutional constraints on incumbent governments.

Suggested Citation

  • Scholl, Almuth, 2017. "The dynamics of sovereign default risk and political turnover," Journal of International Economics, Elsevier, vol. 108(C), pages 37-53.
  • Handle: RePEc:eee:inecon:v:108:y:2017:i:c:p:37-53
    DOI: 10.1016/j.jinteco.2017.05.002
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    Cited by:

    1. Scholl, Almuth & Kaas, Leo & Meller, Jan, 2016. "Sovereign and Private Default Risks over the Business Cycle," Annual Conference 2016 (Augsburg): Demographic Change 145958, Verein für Socialpolitik / German Economic Association.
    2. Timm M. Prein & Almuth Scholl, 2018. "The Impact of Bailouts on Political Turnover and Sovereign Default Risk," Working Paper Series of the Department of Economics, University of Konstanz 2018-04, Department of Economics, University of Konstanz.
    3. Fink, Fabian & Scholl, Almuth, 2016. "A quantitative model of sovereign debt, bailouts and conditionality," Journal of International Economics, Elsevier, vol. 98(C), pages 176-190.
    4. Gabriel Mihalache, 2017. "Sovereign Default Resolution Through Maturity Extension," Department of Economics Working Papers 17-08, Stony Brook University, Department of Economics.

    More about this item

    Keywords

    Sovereign debt; Default risk; Political turnover; Fiscal policy;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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