A Model of Sovereign Debt in Democracies

June 1, 2008

Preview Citation

Format: Chicago

Ali Alichi. A Model of Sovereign Debt in Democracies, (USA: International Monetary Fund, 2008) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper develops and empirically tests a political economy model of sovereign debt. The main incentive for repaying sovereign debt is to maintain access to international capital markets. However, in a democracy, one generation may choose default regardless of its consequences for future generations. An old generation with little concern for its country's access to capital markets can force a default on debt if it has the majority of voters. On the other hand, if the younger generation is more numerous, it can force repayment of previously defaulted debt. Other voter heterogeneities, such as in income, can generate similar results.

Subject: Debt default, Insurance, Insurance companies, International capital markets, Public debt

Keywords: Insurance contract, Political economy, Simple majority, Transfer payment, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/152
Stock No:

WPIEA2008152
ISBN:

9781451870107
ISSN:

1018-5941

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