Sovereign Indebtedness, Default, and Gambling for Redemption
Developing country politicians, faced with the specter of losing office following a costly default, may be tempted to ¿gamble for redemption¿ by instituting policies that increase the volatility of output growth, possibly at the expense of reducing average growth. We present a simple model of debt o...
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| Format: | article |
| Status: | Published version |
| Publication Date: | 2010 |
| Country: | Colombia |
| Institution: | Universidad de los Andes |
| Repository: | Séneca: repositorio Uniandes |
| Language: | English |
| OAI Identifier: | oai:repositorio.uniandes.edu.co:1992/46836 |
| Online Access: | http://hdl.handle.net/1992/46836 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1603728 |
| Access Level: | Open access |
| Keyword: | Debt Forgiveness Sovereign Default Public Investment Gambling for Redemption Fiscal Policy Monetary Policy |
| Summary: | Developing country politicians, faced with the specter of losing office following a costly default, may be tempted to ¿gamble for redemption¿ by instituting policies that increase the volatility of output growth, possibly at the expense of reducing average growth. We present a simple model of debt overhang that captures this intuition. Empirically, we demonstrate that sovereign defaults are significantly associated with an increased probability of job loss by political leaders: after controlling for other determinants, the quantitative effect of a default on the probability of job loss is comparable to a 3.5 standard deviation fall in economic growth. Cross country regressions reveal that, as predicted by our model, higher indebtedness is associated with higher monetary, fiscal, and public investment policy volatility and with policies that increase output volatility at the expense of growth. |
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