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Working Paper
The Politics of Debt in the Era of Rising Rates
We examine how the post-pandemic trajectory of risk-free rates—from historically low levels in 2020 to a steep rise in 2022—affects sovereign debt management and default risk in emerging markets (EMs). Using a dynamic political economy model, we show that weak institutional environments with political incentives to engage in corruption spending lead to over-borrowing and increased default risk, especially during low-rate periods. As rates rise, EMs face high risks of default or the need for austerity programs, depending on the severity of productivity shocks. While International Financial ...
Working Paper
Clientelism, Institutions and Sovereign Default
Emerging economies exhibit pro-cyclical fiscal policy, counter-cyclical sovereign spreads, and recurrent debt crises, whereas advanced economies sustain high debt with low spreads and lower volatility in outcomes. We document that these differences are systematically related to institutional strength, measured by horizontal accountability, and to the prevalence of clientelistic allocation of public resources in a panel of 51 countries (1994-2023). We develop a dynamic political-economy model of sovereign borrowing with long-term debt in which institutional constraints discipline clientelistic ...