The Impact of Bailouts on Political Turnover and Sovereign Default Risk
Timm M. Prein () and
Almuth Scholl ()
Additional contact information
Timm M. Prein: University of Konstanz, Department of Economics, Germany
No 2018-04, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz
This paper develops a stochastic dynamic politico-economic model of sovereign debt to analyze the impact of bailouts on sovereign default risk and political turnover. We consider a small open economy in which the government has access to official loans conditional on the implementation of austerity policies. There is a two-party system in which both parties care about the population’s welfare but differ in an exogenous utility cost of default. Political turnover is the endogenous outcome of the individual voting behavior. In a quantitative exercise we apply the model to Greece and find that bailout episodes are characterized by an increased risk of political turnover. In the short run, stricter conditionality raises the risk of sovereign default because it reduces the participation rate in bailout programs. In the long run, however, stricter conditionality limits the accumulation of debt which lowers sovereign default risk. We show that the frequency of political turnover is U-shaped in the strength of conditionality.
Keywords: sovereign default risk; political turnover; bailouts; conditionality; austerity (search for similar items in EconPapers)
JEL-codes: E44 E62 F34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://www.uni-konstanz.de/FuF/wiwi/workingpaperse ... rein_Scholl_2018.pdf (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:knz:dpteco:1804
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz Contact information at EDIRC.
Bibliographic data for series maintained by Office Ursprung ().