Public Capital and Fiscal Constraint in Sovereign Debt Crises

Tamon Asonuma and Hyungseok Joo

No 621, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: Sovereigns' public capital and fiscal constraint influence sovereign debt crises and resolution. We compile a dataset on public expenditure composition around restructurings with private external creditors. We show that during restructurings, public investment (i) experiences severe decline and slow recovery, (ii) differs from public consumption and transfers, and (iii) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows public investment dynamics and tight fiscal constraint delay debt settlement - †capital accumulation delays" and “fiscal delays†. Data support these theoretical predictions.

JEL-codes: F34 F41 H63 (search for similar items in EconPapers)
Pages: 86 pages
Date: 2021-06
New Economics Papers: this item is included in nep-dge and nep-opm
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0621

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