NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sovereign Debt, Government Myopia, and the Financial Sector

Viral V. Acharya, Raghuram G. Rajan

NBER Working Paper No. 17542
Issued in October 2011
NBER Program(s):   CF   EFG   IFM

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.

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This paper was revised on June 26, 2014

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Document Object Identifier (DOI): 10.3386/w17542

Published: Viral V. Acharya & Raghuram G. Rajan, 2013. "Sovereign Debt, Government Myopia, and the Financial Sector," Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1526-1560. citation courtesy of

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