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Domestic and Foreign Sovereign Debt Stability

Author

Listed:
  • Torres, Leonardo Barros
  • Paczos, Wojtek

    (Cardiff Business School)

  • Shakhnov,

    (University of Surrey)

Abstract

We present a theory of determinants of sovereign debt stability on foreign and domestic markets. Besides the two traditional factors - debt size and output contractions, we highlight the role of the third factor: distortionary tax, which hinders the government’s ability to freely raise revenues. We emphasise the impact of tax distortions and output fluctuations on the trade-off between domestic and foreign debt stability. The paper explains why outright defaults in domestic debt are rare, despite its significant share in public debt, and provides insights into optimal debt issuance and taxation strategies.

Suggested Citation

  • Torres, Leonardo Barros & Paczos, Wojtek & Shakhnov,, 2024. "Domestic and Foreign Sovereign Debt Stability," Cardiff Economics Working Papers E2024/8, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2024/8
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    References listed on IDEAS

    as
    1. Coimbra, Nuno, 2020. "Sovereigns at risk: A dynamic model of sovereign debt and banking leverage," Journal of International Economics, Elsevier, vol. 124(C).
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    More about this item

    Keywords

    sovereign debt; debt stability; selective default; debt composition; distortionary tax;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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