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Power-Law Distribution in the Debt-to-Fiscal Revenue Ratio: Empirical Evidence and a Theoretical Model

Gilles Dufrénot () and Anne Paret

No 1627, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: This paper provides evidence that the external debt-to-fiscal revenue ratio in the emerging countries has a power-law distribution. Such a distribution reflects the fact that debt distress or debt crises are extreme events that have been found to happen fairly often. We formally test the hypothesis of a power-law, going further than the usual visual inspection of the distribution of the variable of interest on a doubly logarithmic scale. We further show that such a distribution can be derived from a theoretical model in which the debt dynamics is explained by tax evasion and corruption. Using the framework of an optimal stochastic growth model, we model the debt-to-fiscal revenue ratio as a diffusion process for which the stochastic steady state distribution is derived using the properties of Itô diffusion processes.

Keywords: power-law; stochastic growth; external debt; emerging countries (search for similar items in EconPapers)
JEL-codes: C14 C51 C61 (search for similar items in EconPapers)
Date: 2016-10
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Working Paper: Power-Law Distribution in the Debt-to-Fiscal Revenue Ratio: Empirical Evidence and a Theoretical Model (2016) Downloads
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