Federal Reserve Bank of Philadelphia
Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default
Europe’s debt crisis resembles historical episodes of outright default on domestic public debt about which little research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives affecting the welfare of risk-averse debt and non-debtholders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as the concentration of debt ownership rises. A government favoring bondholders can also sustain debt, with debt rising as ownership becomes more concentrated. These results are robust to adding foreign investors, redistributive taxes, or a second asset.
Cite this item
Pablo D'Erasmo & Enrique G. Mendoza, Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default, Federal Reserve Bank of Philadelphia, Working Papers 16-23, 09 Aug 2016.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
Keywords: Public debt; Sovereign default; European debt crisis
This item with handle RePEc:fip:fedpwp:16-23
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