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Sovereign Debt Overhang, Expenditure Composition and Debt Restructurings

Tamon Asonuma () and Hyungseok Joo ()

No 1519, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: Sovereigns' public capital influences sovereign debt crises and resolution. We compile a dataset on public expenditure composition around restructurings with private external creditors. We show that during restructurings, public investment (i) experiences severe decline and slow recovery, (ii) differs from public consumption and transfers, (iii) reduces share in public expenditure, and (iv) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows severe decline and slow recovery in public investment – “sovereign debt overhang” – delay debt settlement. Data support these theoretical predictions.

JEL-codes: F34 F41 H63 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2019-07
New Economics Papers: this item is included in nep-dge, nep-opm and nep-pub
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