Government Debt and Default in a Minimal State

Maximilian Ludwig (mludwig@mludwig.org)
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Maximilian Ludwig: Department of Economics, Hamburg University, Postal: Von-Melle-Park 5, 20146 Hamburg, Germany

No 30/2013, Working Papers from Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE)

Abstract: I construct a model of a small open economy in which government spending is necessary to mitigate transaction cost. This provides a simple raison d’etre for a government and generates features many sovereign default models do not have: taxes and government spending. Even though the government sector is relatively small, the model can generate average and peak levels of government debt as well as second moments in line with business cycle statistics of Argentina. The model is solved using an algorithm that works roughly similar to earlier works in this literature, but avoids their issues with erroneous approximations.

Keywords: Sovereign Default; Government Spending; Interest Rates (search for similar items in EconPapers)
JEL-codes: F32 F34 H63 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-07-05
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:ris:cigewp:2013_030

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