|
Archive@NYU >
Stern School of Business >
Finance Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/31365
|
| Title: | Sovereign debt, government myopia, and the financial sector |
| Authors: | Acharya, Viral V.
Rajan, Raghuram G. |
| Issue Date: | 13-Dec-2011 |
| Series/Report no.: | FIN-11-032 |
| Abstract: | What determines the sustainability of sovereign debt? In this paper, we
develop a model where myopic governments seek electoral popularity but
can nevertheless commit credibly to service external debt. They do not
default when they are poor because they would lose access to debt
markets and be forced to reduce spending; they do not default when they
become rich because of the adverse consequences to the domestic
financial sector. Interestingly, the more myopic a government, the
greater the advantage it sees in borrowing, and therefore the less
likely it will be to default (in contrast to models where sovereigns
repay because they are concerned about their long term reputation). More
myopic governments are also likely to tax in a more distortionary way,
and create more dependencies between the domestic financial sector and
government debt that raise the costs of default. We use the model to
explain recent experiences in sovereign debt markets. |
| URI: | http://hdl.handle.net/2451/31365 |
| Appears in Collections: | Finance Working Papers
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
