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Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity

Author

Listed:
  • Alessandro Dovis
  • Mikhail Golosov
  • Ali Shourideh
Abstract
We study optimal fiscal and redistributive policies in an open economy without commitment. Due to its redistributive motives, the government’s incentive to default on its external debt is affected by inequality. We show that in equilibrium the economy endogenously fluctuates between two regimes. In the first regime, the government borrows from abroad, spends generously on transfers and keeps the inequality low. In the second regime, it implements austerity-like policies by cutting transfers, reducing foreign debt and increasing the inequality. The equilibrium dynamics resembles the populist cycles documented in many developing countries.

Suggested Citation

  • Alessandro Dovis & Mikhail Golosov & Ali Shourideh, 2016. "Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity," NBER Working Papers 21948, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21948
    Note: EFG IFM POL
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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F30 - International Economics - - International Finance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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