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Ricardian equivalence, foreign debt and sovereign default risk

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  • Eichler, Stefan
  • Pyun, Ju Hyun
Abstract
We study the impact of sovereign solvency on the private-public savings offset. Using data on 80 economies for 1989–2018, we find robust evidence for a U-shaped pattern in the private-public savings offset in sovereign credit ratings. While the 1:1 savings offset is observed at intermediate levels of sovereign solvency, fiscal deficits are not offset by private savings at extremely low and high levels of sovereign solvency. Particularly, the U-shaped pattern is more pronounced for countries with high levels of foreign ownership of government debt. The U-shaped pattern is an emerging market phenomenon; additionally, it is confirmed when considering foreign currency rating and external public debt, but not for domestic currency rating and domestic public debt. For considerable foreign ownership of sovereign bonds, sovereign default constitutes a net wealth gain for domestic consumers.

Suggested Citation

  • Eichler, Stefan & Pyun, Ju Hyun, 2022. "Ricardian equivalence, foreign debt and sovereign default risk," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 21-49.
    • Handle: RePEc:eee:jeborg:v:197:y:2022:i:c:p:21-49
    DOI: 10.1016/j.jebo.2022.02.021
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    More about this item

    Keywords

    Sovereign default risk; External public debt; Ricardian equivalence; Fiscal policy; Private saving; Emerging markets;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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