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Foreign Debt and the Ricardian Equivalence

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  • Eric Mengus

    (Toulouse School of Economics)

Abstract

This paper shows that Bulow and Rogoff's "no sovereign lending" result does not apply in non-Ricardian economies. When a government strictly prefers debt-based to tax-based funding, an endogenous cost arises, prompting the government to repay. More accurately, a government which does not have enough tools to reach the first best (in which the Ricardian equivalence holds), cannot afford to redistribute the gains from default, and therefore net losses to agents will emerge in the economy. Finally, when foreign debt levels are small, the gains of default do not balance these losses.

Suggested Citation

  • Eric Mengus, 2012. "Foreign Debt and the Ricardian Equivalence," 2012 Meeting Papers 412, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:412
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    References listed on IDEAS

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    Cited by:

    1. Mengus, E., 2014. "Honoring Sovereign Debt or Bailing Out Domestic Residents: A Theory of Internal Costs of Default," Working papers 480, Banque de France.
    2. E. Mengus, 2014. "International Bailouts: Why Did Banks' Collective Bet Lead Europe to Rescue Greece?," Working papers 502, Banque de France.
    3. Toan Phan, 2016. "Information, Insurance and the Sustainability of Sovereign Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 93-108, October.
    4. Mengus, Eric, 2018. "Honoring sovereign debt or bailing out domestic residents? The limits to bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 14-24.
    5. Diego J. Perez, 2015. "Sovereign Debt, Domestic Banks and the Provision of Public Liquidity," Discussion Papers 15-016, Stanford Institute for Economic Policy Research.

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