Domestic and External Sovereign Debt

Sveriges Riksbank Working Paper No. 345

Riksbank Research Paper Series No. 169

43 Pages Posted: 31 Jan 2018

See all articles by Paola Di Casola

Paola Di Casola

Sveriges Riksbank - Monetary Policy

Spyridon Sichlimiris

Örebro University, School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: November 1, 2017

Abstract

Why do countries tend to repay their domestic and external debt, even though the legal enforcement of the sovereign debt contract is limited? Contrary to conventional wisdom, we argue that temporary market exclusion after default is costly. When the domestic financial market is characterized by a scarcity of private saving instruments, a government can partition its debt market into domestic and external segments, by restricting capital flows, to exploit its market power. The government’s market power mitigates the problem of limited commitment, by making default a more costly option. Consequently, it extends the government’s external debt capacity. We replicate the domestic and external sovereign debt for non-advanced economies, by unveiling their link to financial repression.

Keywords: sovereign debt, sovereign default, financial repression, financial development, capital controls

JEL Classification: E21, E44, E60, F34, F38, G15, G18, H63, O16

Suggested Citation

Di Casola, Paola and Sichlimiris, Spyridon, Domestic and External Sovereign Debt (November 1, 2017). Sveriges Riksbank Working Paper No. 345, Riksbank Research Paper Series No. 169, Available at SSRN: https://ssrn.com/abstract=3114424 or http://dx.doi.org/10.2139/ssrn.3114424

Paola Di Casola (Contact Author)

Sveriges Riksbank - Monetary Policy ( email )

SE-103 37 Stockholm
Sweden

Spyridon Sichlimiris

Örebro University, School of Business ( email )

SE-70182 Orebro
Sweden

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