The politics of redistribution and sovereign default

Arbeitspapier

This paper studies how distributional and electoral concerns shape sovereign default incentives within a quantitative model of sovereign debt with heterogeneous agents and non-linear income taxation. The small open economy is characterized by a two-party system in which the left-wing party has a larger preference for redistribution than the right-wing party. Political turnover is the endogenous outcome of the electoral process. Fiscal policy faces a tradeoff: On the one hand, the government has incentives to fi- nance redistribution via external debt to avoid distortionary income taxation. On the other hand, the accumulation of external debt raises the cost of borrowing. Quanti- tative findings suggest that the left-wing party implements a more progressive income tax, is more prone to default, and has a lower electoral support than the right-wing party due to worse borrowing conditions and the distortionary effects of income taxa- tion. In equilibrium, electoral uncertainty raises sovereign default risk.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper Series ; No. 13

Classification and Topics

• Classification: Politik ; International Lending and Debt Problems ; National Debt; Debt Management; Sovereign Debt ; Fiscal Policy ; Open Economy Macroeconomics ; Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
• Subject: sovereign debt and default ; inequality ; redistribution ; political economy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Scholl, Almuth
• Event: Veröffentlichung
• (who): University of Konstanz, Cluster of Excellence "The Politics of Inequality"
• (where): Konstanz
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/271034
• URN: urn:nbn:de:bsz:352-2-1hylp0rl3f01o8
• Last update: 10.03.2025, 11:42 AM CET