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Political economics of external sovereign defaults
- We develop a dynamic recursive model where political and economic decisions interact, to study how excessive debt-GDP ratios affect political sustainability of prudent fiscal policies. Rent seeking groups make political decisions – to cooperate (or not) – on the allocation of fiscal budgets (including rents) and issuance of sovereign debt. A classic commons problem triggers collective fiscal impatience and excessive debt issuing, leading to a vicious circle of high borrowing costs and sovereign default. We analytically characterize debt-GDP thresholds that foster cooperation among rent seeking groups and avoid default. Our analysis and application helps in understanding the politico-economic sustainability of sovereign rescues, emphasizing the need for fiscal targets and possible debt haircuts. We provide a calibrated example that quantifies the threshold debt-GDP ratio at 137%, remarkably close to the target set for private sector involvement in the case of Greece.
Author: | Carolina Achury, Christos Koulovatianos, John D. Tsoukalas |
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URN: | urn:nbn:de:hebis:30:3-382782 |
URL: | http://ssrn.com/abstract=2631418 |
DOI: | https://doi.org/10.2139/ssrn.2631418 |
Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 508 |
Series (Serial Number): | CFS working paper series (508) |
Publisher: | Center for Financial Studies |
Place of publication: | Frankfurt, M. |
Document Type: | Working Paper |
Language: | English |
Date of Publication (online): | 2015/07/17 |
Date of first Publication: | 2015/07/17 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2015/10/08 |
Tag: | EU crisis; Graccident; Grexit; incentive compatibility; international lendin; rent seeking; sovereign debt; tragedy of the commons; world interest rates |
Issue: | July 2, 2015 |
Page Number: | 72 |
HeBIS-PPN: | 366777777 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |