Long-Term Sovereign Debt: A Steady State Analysis

Zachary Stangebye ()

Review of Economic Dynamics, 2023, vol. 48, 107-131

Abstract: A model of long-term sovereign debt with a fiscal rule and endogenous default is explored in which debt maturity governs the number of risky steady states. Generally, there is a good steady state with high investment and low indebtedness and default frequencies, and a bad steady state with the reverse. The multiplicity arises when maturity tames an aggressive feedback loop that emerges in the sovereign budget set between debt service and required issuance as expected default frequencies rise. This feedback loop delivers a unique risky steady state at shorter maturities. Local dynamics and policy consequences are explored quantitatively. (Copyright: Elsevier)

Keywords: Long-term sovereign debt; steady state; equilibrium multiplicity (search for similar items in EconPapers)
JEL-codes: E44 F34 G01 H63 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.red.2022.03.002

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