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Title:External sovereign debt in a monetary union: Bailouts and the role of corruption PDF Logo
Authors:Achury, Carolina
Koulovatianos, Christos
Tsoukalas, John D.
Issue Date:2011
Series/Report no.:CESifo working paper: Fiscal Policy, Macroeconomics and Growth 3532
Abstract:We build a tractable stylized model of external sovereign debt and endogenous international interest rates. In corrupt economies with rent-seeking groups stealing public resources, a politico-economic equilibrium is characterized by permanent fiscal impatience which leads to excessive issuing of sovereign bonds. External creditors envision the corrupt economy's fiscal impatience and buy its bonds at higher interest rates. In turn, this interest-rate increase exacerbates the problem of oversupplying debt, leading the economy to a perfect-foresight trap. In incorrupt countries which have entered a high-interest-rate/high debt-GDP-ratio trap because an immediately recent disaster has caused a sudden jump to a high outstanding debt-GDP ratio, we show that bailout plans with controlled interest rates can help in reducing debt-GDP ratios after some time. On the contrary, under corruption, we show that bailouts are ineffective unless rent-seeking groups are eradicated.
Subjects:sovereign debt
world interest rates
international lending
rent seeking
JEL:H63
F34
F36
G01
E44
E43
D72
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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