Sovereign default, political instability and political fragmentation

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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.

Idioma originalInglés
Páginas (desde-hasta)732-755
Número de páginas24
PublicaciónReview of International Economics
Fecha en línea anticipada5 oct. 2020
EstadoPublicada - set. 2021

Nota bibliográfica

Publisher Copyright:
© 2020 John Wiley & Sons Ltd

Funding Information:
I am indebted to Roberto Chang for his guidance and advice. I have benefited from insightful comments by Todd Keister, Michael D. Bordo, Colin Campbell, Marina Azzimonti, Leonardo Martinez, Federico Mandelman and Cristina Fuentes-Albero. I also thank participants at Rutgers, the Federal Reserve Bank of Atlanta, CIDE, Universidad del Pac?fico, Pontificia Universidad Catolica de Chile, the 2015 Spring Midwest Macro Meetings (Federal Reserve Bank of St. Louis & Washington U.), the Georgetown Center for Economic Research Biennial Conference 2015, the XX Lacea Annual Meeting and the 2017 Annual Congress of the European Economic Association. Part of this work was completed at the research department of the Federal Reserve Bank of Atlanta; I gratefully acknowledge the hospitality and financial support they so generously provided.

Publisher Copyright:
© 2020 John Wiley & Sons Ltd


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