Abstract
This paper studies sovereign borrowing and default in an economy in which self-interested political parties bargain over the budget and there is political turnover. The model generates an endogenous distribution of resources that depends on borrowing decisions, and policymakers become short-sighted. The party in power, as well as the coalition members, obtain a higher share of aggregate consumption as leverage increases. Very small changes in these shares generate non-negligible shifts in the default/repayment sets. This mechanism provides an explanation for why governments increase their leverage and default more frequently, in comparison to a model with a constant distribution of resources.
Original language | English |
---|---|
Pages (from-to) | 732-755 |
Number of pages | 24 |
Journal | Review of International Economics |
Volume | 29 |
Issue number | 4 |
Early online date | 5 Oct 2020 |
DOIs | |
State | Published - Sep 2021 |
Bibliographical note
Publisher Copyright:© 2020 John Wiley & Sons Ltd
Publisher Copyright:
© 2020 John Wiley & Sons Ltd