A Model of Sovereign Debt in Democracies

Ali Alichi

No 08/152, IMF Working Papers from International Monetary Fund

Abstract: This paper develops and empirically tests a political economy model of sovereign debt. The main incentive for repaying sovereign debt is to maintain access to international capital markets. However, in a democracy, one generation may choose default regardless of its consequences for future generations. An old generation with little concern for its country's access to capital markets can force a default on debt if it has the majority of voters. On the other hand, if the younger generation is more numerous, it can force repayment of previously defaulted debt. Other voter heterogeneities, such as in income, can generate similar results.

Keywords: Working Paper; Sovereign debt; International capital markets; Political economy; Economic models; Data analysis (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm and nep-pol
Date: Written 2008-06-23
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