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The Political Economy of Sovereign Defaults

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Listed:
  • Eugenia Andreasen
  • Guido Sandleris
  • Alejandro Van Der Ghote

Abstract

In times of crises, sovereign debt repayment typically depends on the implementation of fiscal programs. In order to implement these programs, governments usually need to garner some political support. The literature of sovereign defaults has not paid attention to the presence of political constraints, assuming instead, that governments have always unlimited access to the resources of the economy to repay their debts. In this paper, we analyze how the presence of political constraints affects sovereign governments´ borrowing and default decisions. We do so in a standard DSGE model with endogeneous default risk where we introduce two novel features: heterogeneous agents in the domestic private sector and a requirement that the government obtains some of their support to implement a fiscal program needed to repay the debt. In this framework, we show that there can be different types of sovereign default events. Default can arise because the government is unwilling to repay, in the best tradition of the sovereign debt literature, but also due to insufficient political support even if a benevolent government would prefer to repay.We calibrate the model to the Argentine economy and show that, once political constraints are taken into account, the matching with the data of standard sovereign debt models is weaker than previously understood.

Suggested Citation

  • Eugenia Andreasen & Guido Sandleris & Alejandro Van Der Ghote, 2011. "The Political Economy of Sovereign Defaults," Business School Working Papers 2011-07, Universidad Torcuato Di Tella.
  • Handle: RePEc:udt:wpbsdt:2011-07
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Can DSGE models describe political cohesion?
      by Jason Rave in Macro Matters on 2012-05-29 02:41:00

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    Cited by:

    1. Pablo D'Erasmo & Enrique G. Mendoza & Jing Zhang, 2015. "What is a Sustainable Public Debt?," NBER Working Papers 21574, National Bureau of Economic Research, Inc.
    2. Enrique Mendoza, 2017. "Optimal Domestic (and External) Sovereign Default," 2017 Meeting Papers 279, Society for Economic Dynamics.
    3. Maren Froemel, 2014. "Imperfect Financial Markets and the Cyclicality of Social Spending," Working Paper Series of the Department of Economics, University of Konstanz 2014-11, Department of Economics, University of Konstanz.
    4. Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Distributional Incentives In An Equilibrium Model Of Domestic Sovereign Default," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 7-44, February.
    5. Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Optimal Domestic (and External) Sovereign Default," NBER Working Papers 22509, National Bureau of Economic Research, Inc.
    6. repec:eee:macchp:v2-2493 is not listed on IDEAS
    7. repec:eee:inecon:v:108:y:2017:i:c:p:37-53 is not listed on IDEAS
    8. Scholl, Almuth, 2017. "The dynamics of sovereign default risk and political turnover," Journal of International Economics, Elsevier, vol. 108(C), pages 37-53.
    9. Guido Sandleris, 2012. "The Costs of Sovereign Defaults:Theory and Empirical Evidence," Business School Working Papers 2012-02, Universidad Torcuato Di Tella.

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