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Government Debt and Default in a Minimal State

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  • Ludwig, Maximilian

    (Department of Economics, Hamburg University)

Abstract

I construct a model of a small open economy in which government spending is necessary to mitigate transaction cost. This provides a simple raison d’etre for a government and generates features many sovereign default models do not have: taxes and government spending. Even though the government sector is relatively small, the model can generate average and peak levels of government debt as well as second moments in line with business cycle statistics of Argentina. The model is solved using an algorithm that works roughly similar to earlier works in this literature, but avoids their issues with erroneous approximations.

Suggested Citation

  • Ludwig, Maximilian, 2013. "Government Debt and Default in a Minimal State," Working Papers 30/2013, Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE).
    • Handle: RePEc:ris:cigewp:2013_030
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Sovereign Default; Government Spending; Interest Rates;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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