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The dynamics of sovereign default risk and political turnover

Almuth Scholl ()

Journal of International Economics, 2017, vol. 108, issue C, 37-53

Abstract: This paper develops a stochastic dynamic politico-economic model of sovereign debt to analyze the interaction of sovereign default risk and political turnover. Two parties differ in their preferred size of unproductive public spending which is financed by taxes and external debt. Electoral outcomes are characterized by the economic benefits from the incumbent's policies and stochastic idiosyncratic ideological aspects. Quantitative findings suggest that endogenous political turnover increases the discrepancies between the optimal borrowing and default policies of the two parties. Prior to a debt crisis, the incumbent government accumulates external debt to foster the probability of remaining in power. The dynamic interaction of electoral outcomes, external debt, and sovereign default supports arguments for imposing institutional constraints on incumbent governments.

Keywords: Sovereign debt; Default risk; Political turnover; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E62 F34 F41 D72 (search for similar items in EconPapers)
Date: 2017
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Working Paper: The Dynamics of Sovereign Default Risk and Political Turnover (2015) Downloads
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