Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity

Alessandro Dovis, Mikhail Golosov and Ali Shourideh

No 21948, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study optimal fiscal and redistributive policies in an open economy without commitment. Due to its redistributive motives, the government’s incentive to default on its external debt is affected by inequality. We show that in equilibrium the economy endogenously fluctuates between two regimes. In the first regime, the government borrows from abroad, spends generously on transfers and keeps the inequality low. In the second regime, it implements austerity-like policies by cutting transfers, reducing foreign debt and increasing the inequality. The equilibrium dynamics resembles the populist cycles documented in many developing countries.

JEL-codes: E60 F30 F34 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pol
Note: EFG IFM POL
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Citations: View citations in EconPapers (40)

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