Power-law distribution in the external debt-to-fiscal revenue ratios: Empirical evidence and a theoretical model

Gilles Dufrénot () and Anne Paret

Journal of Macroeconomics, 2019, vol. 60, issue C, 341-359

Abstract: This paper provides evidence that the external debt-to-fiscal revenue ratio in emerging countries follows a power-law distribution. Such a distribution reflects the fact that external debt distress or debt crises correspond to extreme events that have been found to happen fairly often. We formally test the hypothesis of a power-law, going further than the usual visual inspection of the distribution of the variable of interest on a doubly logarithmic scale. We also show that such a distribution can be derived from a theoretical model in which uncertainty comes from tax evasion and corruption. Using the framework of an optimal stochastic growth model, we model the external debt-to-fiscal revenue ratio as a diffusion process for which the stochastic steady state distribution is derived using the properties of Itô diffusion processes.

Keywords: Power-law; Stochastic growth; External debt; Emerging countries (search for similar items in EconPapers)
JEL-codes: C14 C51 C61 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Power-law distribution in the external debt-to-fiscal revenue ratios: Empirical evidence and a theoretical model (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:60:y:2019:i:c:p:341-359

DOI: 10.1016/j.jmacro.2019.04.002

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