Journal Article

Sovereign Debt, Government Myopia, and the Financial Sector

Viral V. Acharya and Raghuram G. Rajan

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 26, issue 6, pages 1526-1560
Published in print June 2013 | ISSN: 0893-9454
Published online April 2013 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hht011
Sovereign Debt, Government Myopia, and the Financial Sector

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  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • Financial Institutions and Services
  • National Budget, Deficit, and Debt

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What determines the sustainability of sovereign debt? We develop a model where myopic governments seek popularity but can nevertheless commit credibly to service external debt. They do not default when debt is low because they would lose access to debt markets and be forced to reduce spending; they do not default as debt builds up and net new borrowing becomes difficult, because of the adverse consequences from default to the domestic financial sector. More myopic governments default less often, but tax in a more distortionary way and increase the vulnerability of the domestic financial sector to future government debt default.

Keywords: E62; G2; H63

Journal Article.  14348 words.  Illustrated.

Subjects: Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Financial Institutions and Services ; National Budget, Deficit, and Debt

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