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Income inequality and sovereign default

Kiyoung Jeon and Zeynep Kabukcuoglu
Authors registered in the RePEc Author Service: Zeynep Yom ()

Journal of Economic Dynamics and Control, 2018, vol. 95, issue C, 211-232

Abstract: In this paper, we study how income inequality matters for government borrowing and default decisions. We extend a standard endogenous sovereign debt default model to allow for heterogeneous agents and stochastic variability in the dispersion of income. We calibrate the model to match a number of stylized facts for Argentina. We show that (i) rising income inequality within a country increases the probability of default significantly; (ii) the effect of output shocks is larger than the effect of inequality shocks; (iii) the joint effect of these two shocks can generate a high default probability consistent with the Argentine data; (iv) the model can match the high volatility of consumption by the poor relative to the rich; and (v) more progressive income taxes lead to lower default risk.

Keywords: Sovereign debt; Default; Income inequality; Redistribution (search for similar items in EconPapers)
JEL-codes: F3 F4 E5 D5 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Income Inequality and Sovereign Default (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:95:y:2018:i:c:p:211-232

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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