Sovereign Debt, Government Myopia, and the Financial Sector

Viral Acharya and Raghuram Rajan

No 17542, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What determines the sustainability of sovereign debt? We develop a model where myopic governments seek popularity but can nevertheless commit credibly to service external debt. They do not default when debt is low because they would lose access to debt markets and be forced to reduce spending; they do not default as debt builds up, and net new borrowing becomes difficult, because of the adverse consequences from default to the domestic financial sector. More myopic governments default less often, but tax in a more distortionary way and increase the vulnerability of the domestic financial sector to future government debt default.

JEL-codes: E62 G2 H63 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (7)

Published as Viral V. Acharya & Raghuram G. Rajan, 2013. "Sovereign Debt, Government Myopia, and the Financial Sector," Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1526-1560.

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Journal Article: Sovereign Debt, Government Myopia, and the Financial Sector (2013)
Working Paper: Sovereign debt, government myopia, and the financial sector (2011)
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