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Seminarios académicos y conferencias

Antonio Cusato, Rutgers University

Sovereign Default, Political Instability and Political Fragmentation

10 mayo 2016 - 17 hrs,

Sala 209, Facultad de Ciencias Económicas y Administrativas UC

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This paper studies sovereign borrowing and default in an economy in which self-interested political parties bargain over the budget. The bargaining mechanism generates an endogenous distribution of resources. The policymaker’s share is the highest among parties. Policymakers become short-sighted because they will not enjoy this favorable distribution if they lose office. Three results arise in this setup. First, contracts available between the country and international investors provide distributional incentives that facilitate borrowing and repayment. The model generates a non-monotonic relationship between the policymaker’s share and potential borrowing decisions, reflecting the tension between political incentives and market discipline. Second, in a model without political factors, the imposition of a low discount factor and the introduction of political instability operate through different channels. In equilibrium, allowing for political instability, or instability and fragmentation, provides a higher frequency of default and more debt—a result that cannot be achieved reducing the discount factor. Third, changes in both political factors are in line with the empirical record. Countries with a higher degree of instability and fragmentation are more prone to register default episodes.