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Do Constitutional Side Payments Induce Subnational Bailouts ?
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
Manuscript (Other academic)
URN: urn:nbn:se:su:diva-22794OAI: diva2:189532
Part of urn:nbn:se:su:diva-119Available from: 2004-04-27 Created: 2004-04-27 Last updated: 2010-01-13Bibliographically approved
In thesis
1. Essays on Debts and Constitutions
Open this publication in new window or tab >>Essays on Debts and Constitutions
2004 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis includes two essays on sovereign debt and one on subnational governments' debts within a federation. In the two first essays, simple constitutional rules - that define how economic interactions unfold - are found to influence the outcome in important ways. The third essay analyzes the effects of short-term trade financing on the terms of an external debt renegotiation.

Sovereign Risk: Constitutions Rule analyzes the executive's choice of whether to reschedule external debt as the outcome of an intra-governmental negotiation. It shows that the form of government set in the Constitution can drive a country's debt rescheduling propensity. The executive's necessity of a confidence vote from the legislature may explain why some democracies do not renegotiate their foreign obligations. In the empirical section, the paper finds that parliamentary democracies (where such confidence rules exist) are indeed less prone to reschedule their foreign liabilities and accumulate arrears on these. Some parliamentary democracies have been able to significantly reduce their debt/GNP ratio without any 'credit incidents'. The empirical results are not sensitive to the classification of borderline regime cases or the quality of democracy and persist even if Latin American countries are excluded from the sample. Moreover, countries with stronger political checks on the executive and lower executive turnover are found to have a lower debt rescheduling propensity.

Do Constitutional Side Payments Induce Subnational Bailouts? looks at the effects of federal revenue sharing on subnational borrowing and debt bailouts. While federal revenue sharing has an ambiguous effect on aggregate subnational borrowing, it drives the demand for a bailout among politicians with subnational constituencies if local and federal revenues are shared on different terms. In case only federal revenues are shared, a pro-bailout coalition is formed by states that are net recipients of the revenue sharing fund and by states with high debt relative to their expected future tax base. In this situation, it is no longer necessary that the median state debt to expected tax base ratio be to the right of the mean for a bailout to be approved by a simple majority vote among state representatives. The predictions of the model rationalize the treatment of state debts by the Brazilian Senate in the late 1980s and 1990s.

Sovereign Debt Recontracting: The Role of Trade Credit and Reserves introduces short-term trade credit into a sovereign debt model. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves may provide net wealth and liquidity services during a negotiation. Gross reserves are found to strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade finance, thereby diminishing its degree of impatience to conclude a renegotiation. Nevertheless, competitive banks do lend to accumulate borrowed reserves, which also provide partial insurance against the consumption risk associated with uncertain output.

Place, publisher, year, edition, pages
Stockholm: Institutet för internationell ekonomi, 2004. 120 p.
Monograph series / Institute for International Economic Studies, University of Stockholm, ISSN 0346-6892 ; 47
debt, constitution, sovereign risk, federalism, credibility, political institutions, renegotiation, trade credit, international reserves, bailout, revenue sharing, soft budget
National Category
Economics and Business
urn:nbn:se:su:diva-119 (URN)91-7265-860-6 (ISBN)
Public defence
2004-05-18, hörsal 10, hus E, Universitetsvägen 10, Stockholm, 10:00
Available from: 2004-04-27 Created: 2004-04-27Bibliographically approved

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