Political economy and endogenous sovereign defaults

• Grant number: 15/04289-0
• Support Opportunities: Scholarships abroad - Research Internship - Doctorate
• Start date: September 01, 2015
• End date: July 31, 2016
• Field of knowledge: Applied Social Sciences - Economics - International Economy
• Principal Investigator: Bernardo de Vasconcellos Guimaraes
• Grantee: André Sander Diniz
• Supervisor: Fernando Broner
• Host Institution: Escola de Economia de São Paulo (EESP). Fundação Getúlio Vargas (FGV). São Paulo , SP, Brazil
• Institution abroad: Universitat Pompeu Fabra (UPF), Spain
• Associated to the scholarship: 14/23849-4 - Essays on international finance: sovereign default, fiscal policy and financial intermediation, BP.DR

Abstract

This project is devoted to study debt crises and its relation to the political economy of fiscal policy. Traditional models of endogenous default assume governments are always a benevolent agent that manages sovereign debt over time to smooth out consumption of the representative agent. However, almost always they abstract from political factors that might influence the actions of those individuals holding power and change incentives for default and debt issuance. Therefore our purpose is to incorporate political economy frictions to an endogenous default model, assuming away the role of government as a benevolent agent, rather motivating it as an agent with own interests, maximizing some particular form of objective function. Our main question is whether politicians with particular interests might choose different levels of debt and have incentives to default in other ocasions, assuming their actions are somehow evaluated by the society and potentially affect electoral outcomes. After building this model we intend to analyse it both qualitatively and quantitatively and compare to the results from the current literature, and possibly also use it to analyse policy issues. (AU)