Income Inequality and Sovereign Default

Kiyoung Jeon () and Zeynep Yom
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Kiyoung Jeon: Research Department, Bank of Korea, http://www.bok.or.kr/eng/main/main.do

No 29, Villanova School of Business Department of Economics and Statistics Working Paper Series from Villanova School of Business Department of Economics and Statistics

Abstract: In this paper, we study the role of income inequality in government's borrowing and default decisions. We consider a standard endogenous sovereign debt default model and extend it to allow for heterogeneous agents. In addition to shocks to the average income level, we consider the effect of shocks to income distribution. Consistent with the data, income dispersion across individuals increases during a recession and decreases during an expansion. The model is calibrated to match a number of stylized facts for Argentina. We show that (i) rising income inequality within a country increases the probability of default significantly; (ii) the effect of output shocks is larger than the effect of inequality shocks; (iii) the joint effect of these two shocks can generate a high default probability consistent with the Argentine data; (iv) the model can match the high volatility of consumption of the poor relative to the rich; (v) progressive income taxes can reduce the default risk.

Keywords: Sovereign Debt; Default; Income Inequality; Redistribution (search for similar items in EconPapers)
JEL-codes: D5 E5 F3 F4 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Income inequality and sovereign default (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:vil:papers:29

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