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Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default

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  • D'Erasmo, Pablo

    (Federal Reserve Bank of Philadelphia)

  • Mendoza, Enrique G.

    (University of Pennsylvania, National Bureau of Economic Research,)

Abstract

Europe’s debt crisis resembles historical episodes of outright default on domestic public debt about which little research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives affecting the welfare of risk-averse debt and non-debtholders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as the concentration of debt ownership rises. A government favoring bondholders can also sustain debt, with debt rising as ownership becomes more concentrated. These results are robust to adding foreign investors, redistributive taxes, or a second asset.

Suggested Citation

  • D'Erasmo, Pablo & Mendoza, Enrique G., 2016. "Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default," Working Papers 16-23, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:16-23
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    Cited by:

    1. repec:eee:inecon:v:108:y:2017:i:c:p:37-53 is not listed on IDEAS
    2. Carmen M. Reinhart & Miguel Angel Santos, 2016. "From Financial Repression to External Distress: The Case of Venezuela," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(2), pages 255-284, February.
    3. Yasunori Fujita, 2016. "A new look at fiscal sustainability: an attempt to reveal the relationship between the sustainability of external debt and the inequality," Economics and Business Letters, Oviedo University Press, vol. 4(4), pages 161-165.
    4. Juessen, Falko & Linnemann, Ludger & Schabert, Andreas, 2016. "Default Risk Premia On Government Bonds In A Quantitative Macroeconomic Model," Macroeconomic Dynamics, Cambridge University Press, vol. 20(01), pages 380-403, January.
    5. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    6. Röhrs, Sigrid & Winter, Christoph, 2017. "Reducing government debt in the presence of inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 1-20.
    7. Falko Juessen & Andreas Schabert, 2013. "Fiscal Policy, Sovereign Default, and Bailouts," Working Paper Series in Economics 67, University of Cologne, Department of Economics.
    8. Scholl, Almuth, 2017. "The dynamics of sovereign default risk and political turnover," Journal of International Economics, Elsevier, vol. 108(C), pages 37-53.
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    10. Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," European Economic Review, Elsevier, vol. 92(C), pages 416-432.
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    12. Velde, Francois R., 2016. "What We Learn from a Sovereign Debt Restructuring in France in 1721," Economic Perspectives, Federal Reserve Bank of Chicago, issue 5, pages 1-17.
    13. Filippo Brutti & Philip Sauré, 2016. "Repatriation Of Debt In The Euro Crisis," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 145-174, February.
    14. Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Optimal Domestic (and External) Sovereign Default," NBER Working Papers 22509, National Bureau of Economic Research, Inc.
    15. repec:eee:dyncon:v:83:y:2017:i:c:p:1-17 is not listed on IDEAS
    16. repec:eee:macchp:v2-2493 is not listed on IDEAS

    More about this item

    Keywords

    Public debt; Sovereign default; European debt crisis;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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