IDEAS home Printed from https://ideas.repec.org/p/red/sed004/762.html
   My bibliography  Save this paper

A Political Model Sovereign Debt Repayment

Author

Listed:
  • Manuel Amador

Abstract

Bulow and Rogoff (1989) show that a country that has access to a sufficiently rich asset market cannot commit to repay its debts and therefore should be unable to borrow. This is because for any debt contract, there exists a time at which the country is made better off by defaulting and replicating the payoffs of the debt contract through savings in the asset market. This paper provides an answer to this paradox based on a political economy model of debt. It shows that the presence of political uncertainty reduces the ability of a country to save, and hence to replicate the original debt contract after default. In a model where different parties alternate in power, an incumbent party with a low probability of remaining in power has a high short-term discount rate and is therefore unwilling to save. The current incumbent party realizes that in the future whoever achieves power will be impatient as well, making the accumulation of assets unsustainable. This time-inconsistency is shown to be equivalent to the problem faced by a hyperbolic consumer. Because of their inability tosave, politicians demand debt ex-post and the desire to borrow again in the future enforces repayment today

Suggested Citation

  • Manuel Amador, 2004. "A Political Model Sovereign Debt Repayment," 2004 Meeting Papers 762, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:762
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Emanuel Kohlscheen, 2010. "Sovereign risk: constitutions rule," Oxford Economic Papers, Oxford University Press, vol. 62(1), pages 62-85, January.
    2. Lagunoff, Roger, 2009. "Dynamic stability and reform of political institutions," Games and Economic Behavior, Elsevier, vol. 67(2), pages 569-583, November.
    3. Jinhui H. Bai & Roger Lagunoff, 2011. "On the Faustian Dynamics of Policy and Political Power," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 17-48.
    4. Christian Hellwig & Guido Lorenzoni, 2009. "Bubbles and Self-Enforcing Debt," Econometrica, Econometric Society, vol. 77(4), pages 1137-1164, July.
    5. Roger Lagunoff (Georgetown University), 2005. "Markov Equilibrium in Models of Dynamic Endogenous Political Institutions," Working Papers gueconwpa~05-05-07, Georgetown University, Department of Economics.
    6. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    7. Brutti, Filippo, 2011. "Sovereign defaults and liquidity crises," Journal of International Economics, Elsevier, vol. 84(1), pages 65-72, May.
    8. Marina Azzimonti, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, American Economic Association, vol. 101(5), pages 2182-2204, August.
    9. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Power fluctuations and political economy," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1009-1041, May.
    10. Brutti, Filippo, 2008. "Legal enforcement, public supply of liquidity and sovereign risk," MPRA Paper 13949, University Library of Munich, Germany.
    11. Marina Azzimonti-Renzo & Matthew Talbert, 2011. "Partisan cycles and the consumption volatility puzzle," Working Papers 11-21, Federal Reserve Bank of Philadelphia.
    12. Ilzetzki, Ethan, 2011. "Rent-seeking distortions and fiscal procyclicality," Journal of Development Economics, Elsevier, vol. 96(1), pages 30-46, September.
    13. Roger Lagunoff, 2004. "The Dynamic Reform of Political Institutions," Econometric Society 2004 Latin American Meetings 47, Econometric Society.
    14. Opp, Marcus M., 2012. "Expropriation risk and technology," Journal of Financial Economics, Elsevier, vol. 103(1), pages 113-129.

    More about this item

    Keywords

    sovereign debt; political economy;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed004:762. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.