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Sovereign Defaults and Public Investment (Capital)

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  • Tamon Asonuma

    (International Monetary Fund)

  • Hyungseok Joo

    (University of Surrey)

Abstract

Sovereigns' public investment (capital) influences sovereign debt crises and resolution. We compile a dataset on public expenditure composition in 1975{2020 for 75 countries. We show that during sovereign debt restructurings with private external creditors, public investment (i) experiences a severe decline and a slow recovery, (ii) differs from public consumption and transfers, and (iii) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows public investment dynamics delay debt settlement (i.e., \capital accumulation delays"). Data support theoretical predictions.

Suggested Citation

  • Tamon Asonuma & Hyungseok Joo, 2023. "Sovereign Defaults and Public Investment (Capital)," School of Economics Discussion Papers 1123, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:1123
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    File URL: https://repec.som.surrey.ac.uk/2023/DP11-23.pdf
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    References listed on IDEAS

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    1. Tamon Asonuma & Hyungseok Joo, 2020. "Sovereign Debt Restructurings: Delays in Renegotiations and Risk Averse Creditors [Sovereign Debt]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2394-2440.
    2. Marina Azzimonti, 2015. "The dynamics of public investment under persistent electoral advantage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 653-678, July.
    3. D’Erasmo, Pablo & Mendoza, Enrique G., 2021. "History remembered: Optimal sovereign default on domestic and external debt," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 969-989.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    6. Rohan Pitchford & Mark L. J. Wright, 2012. "Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 812-837.
    7. Grey Gordon & Pablo Guerron-Quintana, 2018. "Dynamics of Investment, Debt, and Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 71-95, April.
    8. Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," European Economic Review, Elsevier, vol. 92(C), pages 416-432.
    9. Demian Pouzo & Ignacio Presno, 2022. "Optimal Taxation with Endogenous Default under Incomplete Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 1-41, July.
    10. Marina Azzimonti, 2015. "The dynamics of public investment under persistent electoral advantage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 653-678, July.
    11. Leeper, Eric M. & Walker, Todd B. & Yang, Shu-Chun S., 2010. "Government investment and fiscal stimulus," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1000-1012, November.
    12. Mr. Tamon Asonuma, 2016. "Serial Sovereign Defaults and Debt Restructurings," IMF Working Papers 2016/066, International Monetary Fund.
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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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