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A Model of Sovereign Debt in Democracies

  • Ali Alichi
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    This paper develops and empirically tests a political economy model of sovereign debt. The main incentive for repaying sovereign debt is to maintain access to international capital markets. However, in a democracy, one generation may choose default regardless of its consequences for future generations. An old generation with little concern for its country's access to capital markets can force a default on debt if it has the majority of voters. On the other hand, if the younger generation is more numerous, it can force repayment of previously defaulted debt. Other voter heterogeneities, such as in income, can generate similar results.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/152.

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    Length: 34
    Date of creation: 01 Jun 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/152
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    1. Andrew K. Rose, 2001. "One reason countries pay their debts: renegotiation and international trade," Staff Reports 142, Federal Reserve Bank of New York.
    2. Kenneth Rogoff & Anne Sibert, 1986. "Elections and Macroeconomic Policy Cycles," NBER Working Papers 1838, National Bureau of Economic Research, Inc.
    3. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
    4. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1997. "Parental Altruism and Inter Vivos Transfers: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1121-66, December.
    5. Cole, Harold L & Kehoe, Timothy J, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 91-116, January.
    6. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Working papers 8813, Wisconsin Madison - Social Systems.
    7. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
    8. Nordhaus, William D, 1975. "The Political Business Cycle," Review of Economic Studies, Wiley Blackwell, vol. 42(2), pages 169-90, April.
    9. Fair, Ray C, 1978. "The Effect of Economic Events on Votes for President," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 159-73, May.
    10. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
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