Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity / Alessandro Dovis, Mikhail Golosov, Ali Shourideh.

Format:

Book

Author/Creator:

Dovis, Alessandro.

Contributor:

National Bureau of Economic Research.

Golosov, Mikhail.

Shourideh, Ali.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21948.

NBER working paper series no. w21948

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Political Economy of Sovereign Debt

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

We study optimal fiscal and redistributive policies in an open economy without commitment. Due to its redistributive motives, the government's incentive to default on its external debt is affected by inequality. We show that in equilibrium the economy endogenously fluctuates between two regimes. In the first regime, the government borrows from abroad, spends generously on transfers and keeps the inequality low. In the second regime, it implements austerity-like policies by cutting transfers, reducing foreign debt and increasing the inequality. The equilibrium dynamics resembles the populist cycles documented in many developing countries.

Notes:

Print version record

January 2016.