Sovereign default, political instability and political fragmentation

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2 Scopus citations


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 languageEnglish
Pages (from-to)732-755
Number of pages24
JournalReview of International Economics
Issue number4
Early online date5 Oct 2020
StatePublished - Sep 2021

Bibliographical note

Publisher Copyright:
© 2020 John Wiley & Sons Ltd

Publisher Copyright:
© 2020 John Wiley & Sons Ltd


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