Expropriation Risk Over the Business Cycle

Hernan D. Seoane and Emircan Yurdagul

No 19469, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Expropriation risks are key to understanding Emerging Economies' stylized facts and shape the business cycles of these countries. We model a benevolent government that chooses taxation without commitment and optimal debt issuance subject to sovereign default risk. Hence, our model introduces two types of expropriation risks in a standard open economy environment. These risks can explain the sovereign debt overhang effect that has been widely documented in the literature. Moreover, we show that the sovereign debt overhang, in turn, contributes to higher default risk leading to a vicious cycle of low investment and high sovereign default risk.

Date: 2024-09
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