The Root Cause of Sovereign Default
MPRA Paper from University Library of Munich, Germany
Sovereign defaults have occurred more frequently in emerging countries and accompany significant currency depreciation and high inflation. The standard model of sovereign default cannot necessarily explain these facts sufficiently. In this paper, I examine the root cause of sovereign default on the basis of a model of inflation that is built on a micro-foundation of government behavior and conclude that the root cause of sovereign default is an insufficiently independent central bank. Without a sufficiently independent central bank, the government inevitably borrows money excessively, and as a result, inflation and currency depreciation accelerate. This situation will frustrate and anger the population, and the government may then declare a sovereign default in an attempt to place the blame on foreign lenders, at least temporarily.
Keywords: Central bank; Exchange rate; Government bond; Inflation; International debt; Sovereign default (search for similar items in EconPapers)
JEL-codes: E58 F31 F34 F53 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:110010
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