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Public debt repudiation: Is it really possible in the EMU? A political economy approach

Author

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  • Debora Di Gioacchino
  • Sergio Ginebri
  • Laura Sabani

Abstract

In cases where policy makers accept "bribes" offered by organised lobbies or interested parties, the government decisions can be modelled as a first price menu auction. In this paper we adapt this structure to model debt repudiation. We consider a one-period model where two generations are present, parents and children, and debt titles are unevenly distributed among parents. The government can repay the debt by a combination of taxes on the children's income and on the outstanding debt. On the hypothesis that all interests are represented (all families are active in the lobbying process), we get the result that, whatever the distribution of the debt, an arbitrarily small repudiation cost excludes the possibility of debt-default. The same result is obtained by introducing a small cost of lobbying. The exclusion of an equilibrium with partial or total debt-default is a relevant result from the standpoint of the stability of the EMU.
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Suggested Citation

  • Debora Di Gioacchino & Sergio Ginebri & Laura Sabani, 1999. "Public debt repudiation: Is it really possible in the EMU? A political economy approach," Working Papers in Public Economics 33, Department of Economics and Law, Sapienza University of Roma.
    • Handle: RePEc:sap:wpaper:wp33
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    Cited by:

    1. Debora Di Gioacchino & Alina Verashchagina, 2017. "Mass media and attitudes to inequality," Working Papers in Public Economics 178, University of Rome La Sapienza, Department of Economics and Law.

    More about this item

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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