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Ricardian equivalence, foreign debt and sovereign default risk

Stefan Eichler and Ju Hyun Pyun

Journal of Economic Behavior & Organization, 2022, vol. 197, issue C, 21-49

Abstract: We study the impact of sovereign solvency on the private-public savings offset. Using data on 80 economies for 1989–2018, we find robust evidence for a U-shaped pattern in the private-public savings offset in sovereign credit ratings. While the 1:1 savings offset is observed at intermediate levels of sovereign solvency, fiscal deficits are not offset by private savings at extremely low and high levels of sovereign solvency. Particularly, the U-shaped pattern is more pronounced for countries with high levels of foreign ownership of government debt. The U-shaped pattern is an emerging market phenomenon; additionally, it is confirmed when considering foreign currency rating and external public debt, but not for domestic currency rating and domestic public debt. For considerable foreign ownership of sovereign bonds, sovereign default constitutes a net wealth gain for domestic consumers.

Keywords: Sovereign default risk; External public debt; Ricardian equivalence; Fiscal policy; Private saving; Emerging markets (search for similar items in EconPapers)
JEL-codes: E21 E62 F40 G01 H60 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:197:y:2022:i:c:p:21-49

DOI: 10.1016/j.jebo.2022.02.021

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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