Domestic and External Debt and Default
Dirk Niepelt ()
No 635, 2016 Meeting Papers from Society for Economic Dynamics
We develop a general equilibrium model with defaultable domestic and external debt. Overlapping generations work, consume, accumulate capital and public debt. Successive, democratically elected governments choose taxes, public goods spending, domestic and external debt issuance and repayment. In Markov perfect equilibrium, political distortions inherent in democratic societies strengthen debt capacity; macroeconomic shocks affect the cost of public funds and debt returns; and debt serves intergenerational risk sharing. Default decisions may or may not be correlated across debt tranches. Minimum debt returns raise the cost of public funds ex post and render default on other tranches more likely; ex ante, they increase the revenue from debt sales but crowd out capital. Political and general equilibrium "wedges" undermine the inter-temporal smoothing of the shadow cost of public funds. Under standard functional form assumptions the model is solved in closed form.
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
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:red:sed016:635
Access Statistics for this paper
More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().