Buradasınız

Inequality and Sovereign Default under Democracy

Journal Name:

Publication Year:

Author NameUniversity of Author
Abstract (2. Language): 
Do differences in the inequality of income affect the likelihood that democratic governments decide not to honor their foreign debt contracts? I argue that sovereign default involves an intertemporal tradeoff between an immediate consumption boost and a future tax increase. Since a poorer voter internalizes less of the future cost of default, as the median is poorer, the majority’s demand for default increases. Therefore, greater income inequality implies a higher default risk. I then present a signaling game that models strategic selection that a sovereign must go through to get to the default decision node. I show that sovereign default is most likely to actually occur when the level of income inequality is intermediate. The intuition is that sovereign default occurs when risky sovereigns successfully induce creditors to provide a loan, but the most risky ones are among those least able to do so. Empirical findings support the claim.
5
40

REFERENCES

References: 

Aggarwal, Vinod K. 1996. Debt Games: Strategic Interaction in International
Debt Rescheduling. New York: Cambridge University Press.
Alesina, Alberto. 1988. “The End of Large Public Debts.” In High Public Debt:
The Italian Experience, edited by Francesco Giavazzi and Luigi Spaventa. New York:
Cambridge University Press.
Alesina, Alberto, and Dani Rodrik. 1994. “Distributive Politics and Economic
Growth.” Quarterly Journal of Economics 109: 465-90.
Alesina, Alberto, and Guido Tabellini. 1990. “A Positive Theory of Fiscal Deficits
and Government Debt.” Review of Economic Studies 57: 403-14.
Alesina, Alberto, Mark De Broeck, Alessandro Prati, Guido Tabellini, Maurice
Obstfeld, and Sergio Rebelo. 1992. “Default Risk on Government Debt in OECD
Countries.” Economic Policy 7: 427-63.
Alesina, Alberto, Nouriel Roubini, and Gerald D. Cohen. 1997. Political Cycles
and the Macroeconomy. Cambridge: MIT Press.
Alichi, Ali. 2008. “A Model of Sovereign Debt in Democracies.” IMF Working
Paper WP/08/152.
Barro, Robert J. 1979. “On the Determination of the Public Debt.” Journal of Political
Economy 87: 940-71.
Bartolini, Leonardo, and Allan Drazen. 1997. “Capital-Account Liberalization as
a Signal.” American Economic Review 87: 138-54.
Beck, Thorsten, George Clarke, Alberto Groff, Philip Keefer, and Patrick Walsh.
2001. “New Tools in Comparative Political Economy: The Database of Political Institutions.”
World Bank Economic Review 15: 165–76.
Berg, Andrew, and Jeffrey Sachs. 1988. “The Debt Crisis: Structural Explanations
of Country Performance.” Journal of Development Economics 29: 271-306.
European Journal of Economic and Political Studies
35
Bernhard, William, and David Leblang. 1999. “Domestic Institutions and Exchange
Rate Commitments.” International Organization 53: 71–97.
Borensztein, Eduardo, and Ugo Panizza. 2009. “The Costs of Sovereign Default.”
IMF Staff Papers 56: 683-741.
Broz, J. Lawrence. 2002. “Political Institutions and the Transparency of Monetary
Policy Commitments.” International Organization 56: 861-87.
Bulow, Jeremy, and Kenneth Rogoff. 1989. “A Constant Recontracting Model of
Sovereign Debt.” Journal of Political Economy 97: 155-78.
Clague, Christopher, Philip Keefer, Stephen Knack, and Mancur Olson. 1996.
“Property and Contract Rights in Autocracies and Democracies.” Journal of Economic
Growth 1: 243-76.
Cohen, Benjamin J. 1982. “Balance-of-Payments Financing: Evolution of a Regime.”
International Organization 36: 457-78.
Cohen, Daniel. 1992. “The Debt Crisis: A Postmortem.” NBER Macroeconomics
Annual, 64-114.
Desai, Raj M., Andres Olofsgård, and Tarik M. Yousef. 2003. “Democracy, Inequality,
and Inflation.” American Political Science Review 97: 391-406.
De Paoli, Bianca, Glenn Hoggarth, and Victoria Saporta. 2006. “Costs of Sovereign
Default.” Bank of England Financial Stability Paper, no. 1.
Detragiache, Enrica, and Antonio Spilimbergo. 2001. “Crises and Liquidity: Evidence
and Interpretation.” IMF Working Paper WP/01/02.
Dooley, Michael P. 2000. “Can Output Losses Following International Financial
Crises be Avoided?” NBER Working Paper 7531.
Drazen, Allen. 1998. “Towards a Political Economic Theory of Domestic Debt.”
In The Debt Burden and its Consequences for Monetary Policy, edited by Guillermo
A. Calvo and Mervyn King. London: MacMillan.
Drazen, Allen. 2002. Political Economy in Macroeconomics. Princeton: Princeton
University Press.
Easterly, William. 2002. “How Did Heavily Indebted Poor Countries Become
Heavily Indebted? Reviewing Two Decades of Debt Relief.” World Development 30:
1677-96.
Yong Kyun Kim
36
Edwards, Martin. 2006. “Signalling Credibility? The IMF and Catalytic Finance.”
Journal of International Relations and Development 9: 27-52.
Edwards, Sebastian. 1984. “LDC Foreign Borrowing and Default Risk: An Empirical
Investigation, 1976–80.” American Economic Review 74: 726–34.
Elkins, Zachary, Andrew T. Guzman, and Beth A. Simmons. 2006. “Competing
for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000.” International
Organization, 60: 811-46.
Gelos, R. Gaston, Ratna Sahay, and Guido Sandleris. 2011. “Sovereign Borrowing
by Developing Countries: What Determines Market Access?” Journal of International
Economics 83: 243-54.
Giordano, Raffaela, and Pietro Tommasino. 2011. “What Determines Debt Intolerance?
The Role of Political and Monetary Institutions.” European Journal of Political
Economy 27: 471-84.
Haggard, S. and Kaufman, R. R. (1989) ‘The Politics of Stabilization and Structural
Adjustment’, in J. D. Sachs (ed.), Developing Country Debt and Economic Performance.
Vol. 1: The International Financial System. Chicago: University of Chicago
Press.
Haggard, Stephan, and Robert R. Kaufman. 1992. “The Political Economy of Inflation
and Stabilization in Middle-Income Countries.” In The Politics of Economic
Adjustment: International Constraints, Distributive Conflicts, and the State, edited by
Stephan Haggard and Robert R. Kaufman. Princeton: Princeton University Press.
Haggard, Stephan, and Robert R. Kaufman. 1995. The Political Economy of Democratic
Transitions. Princeton: Princeton University Press.
Haque, Nadeem Ul, Nelson Mark, and Donald J. Mathieson. 2000. “Rating Africa:
The Economic and Political Content of Risk Indicators.” In Investment and Risk in
Africa, edited by Paul Collier and Catherine A. Pattillo. New York: St. Martins Press.
Hatchondo, Juan Carlos, and Leonardo Martinez. 2010. “The Politics of Sovereign
Defaults.” Economic Quarterly 96: 291-317.
Huntington, Samuel P. 1991. The Third Wave: Democratization in the Late Twentieth
Century. Vol. 4. Norman: University of Oklahoma Press.
Karayalçin, Cem, and Kathryn McCollister. 2004. “Income Inequality, Sovereign
European Journal of Economic and Political Studies
37
Debt, and Public Investment.” Typescript, Florida International University.
Kennedy, Alex, and Theresa Bradley. 2006. “Ecuador to Unveil Debt Restructuring
Plan by February.” Bloomberg, December 21.
Kerner, Andrew. 2009. “Why Should I Believe You? The Costs and Consequences
of Bilateral Investment Treaties.” International Studies Quarterly 53: 73-102.
Kim, Yong Kyun, and Daniel O’Neill. forthcoming. “Transparent Motives: The
Democratic Advantage in International Credit Markets.” Journal of International Relations
and Development.
Lane, Philip R. 1999. “North-South Lending with Moral Hazard and Repudiation
Risk.” Review of International Economics 7: 50-8.
Lewis, Jeffrey, and Kenneth Schultz. 2003. “Revealing Preferences: Empirical Estimation
of a Crisis Bargaining Game with Incomplete Information.” Political Analysis
11: 345-67.
Mahon, James E. 1996. Mobile Capital and Latin American Development. University
Park: Pennsylvania State University Press.
Manasse, Paolo, and Nouriel Roubini. 2009. “‘Rules of Thumb’ for Sovereign
Debt Crises.” Journal of International Economics 78: 192-205.
Marshall, Monty G., and Keith Jaggers. 2010. Polity IV Project: Political Regime
Characteristics and Transitions, 1800-2010. Center for Systemic Peace, University of
Maryland.
Meltzer, Allan H., and Scott F. Richard. 1981. “A Rational Theory of the Size of
Government.” Journal of Political Economy 89: 914-27.
Mitchener, Kris James, and Marc D. Weidenmier. 2010. “Supersanctions and
Sovereign Debt Repayment.” Journal of International Money and Finance 29: 19-36.
Moody’s. 1999. “Moody’s Sovereign Ratings: A Ratings Guide.” Special Comment,
Moody’s Investors Service.
Nelson, Joan M. 1990. Economic Crisis and Policy Choice: The Politics of Adjustment
in Developing Countries. Princeton: Princeton University Press.
Panizza, Ugo, Federico Sturzenegger, and Jeromin Zettelmeyer. 2009. “The
Economics and Law of Sovereign Debt and Default.” Journal of Economic Literature
47: 651-98.
Yong Kyun Kim
38
Pastor Jr., Manuel. 1987. “The Effects of IMF Programs in the Third World: Debate
and Evidence from Latin America.” World Development 15: 249-62.
Pastor Jr., Manuel, and Sylvia Maxfield. 1999. “Central Bank Independence and
Private Investment in the Developing World.” Economics and Politics 11: 299-309.
Persson, Torsten, and Guido Tabellini. 1994. “Is Inequality Harmful for Growth?”
American Economic Review 84: 600-21.
Persson, Torsten, and Guido Tabellini. 2000. Political Economics: Explaining
Economic Policy. Cambridge: MIT Press.
Pescatori, Andrea, and Amadou N. R. Sy. 2007. “Are Debt Crises Adequately
Defined?” IMF Staff Papers 54: 306-37.
Peter, Marcel. 2002. “Estimating Default Probabilities of Emerging Market Sovereigns:
A New Look at a Not-So-New Literature.” Economics Section, The Graduate
Institute of International Studies, HEI Working Paper 06.
Reinhart, Carmen M., Kenneth S. Rogoff, and Miguel A. Savastano. 2003. “Debt
Intolerance.” Brookings Papers on Economic Activity 1: 1-62.
Rose, Andrew K. 2005. “One Reason Countries Pay Their Debts: Renegotiation
and International Trade.” Journal of Development Economics 77: 189-206.
Rose, Andrew K., and Mark M. Spiegel. 2004. “A Gravity Model of Sovereign
Lending: Trade, Default, and Credit.” IMF Staff Papers 51: 50-63.
Saiegh, Sebastian M. 2005. “Do Countries Have a Democratic Advantage?”
Comparative Political Studies 38: 366-87.
Schultz, Kenneth A., and Barry R. Weingast. 2003. “The Democratic Advantage:
Institutional Foundations of Financial Power in International Competition.” International
Organization, 57: 3-42.
Solt, Frederick. 2009. “Standardizing the World Income Inequality Database.”
Social Science Quarterly 90: 231-42.
Stone, Randall W. 2004. “The Political Economy of IMF Lending in Africa.” American
Political Science Review 98: 577-91.
Tomz, Michael. 2005a. “Democratic Default: Domestic Audiences and Compliance
with International Agreements.” Typescript, Stanford University.
European Journal of Economic and Political Studies
39
Tomz, Michael. 2005b. “Interests, Information, and the Domestic Politics of International
Agreements.” Typescript, Stanford University.
Tomz, Michael. 2007. Reputation and International Cooperation: Sovereign Debt
across Three Centuries. Princeton: Princeton University Press.
Tomz, Michael, and Mark L. J. Wright. 2007. “Do Countries Default in ‘Bad
Times’?”, Journal of the European Economic Association 5: 352-60.
Vreeland, James Raymond. 2002. “The Effect of IMF Programs on Labor.” World
Development 30: 121-39.
Vreeland, James Raymond. 2003. The IMF and Economic Development. New
York: Cambridge University Press.
World Bank. 2005. Global Development Finance 2005: Mobilizing Finance and
Managing Vulnerability. Washington, D.C.: The World Bank.

Thank you for copying data from http://www.arastirmax.com