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What determines debt intolerance? The role of political and monetary institutions

  • Raffaela Giordano

    ()

    (Bank of Italy)

  • Pietro Tommasino

    ()

    (Bank of Italy)

Why do some states default on their debt more often than others? We argue that sovereign default is the outcome of a political struggle among different groups of citizens. It is more likely to happen if: (i) domestic debt-holders are relatively weak; (ii) the the political costs of the financial turmoil typically triggered by a sovereign bankrupcy are small. We show that these conditions are in turn more likely to be present if a country lacks a well-developed financial system and/or a sufficiently independent central bank.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 700.

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Date of creation: Mar 2009
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Handle: RePEc:bdi:wptemi:td_700_09
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