What Determines Debt Intolerance? The Role of Political and Monetary Institutions

29 Pages Posted: 11 Mar 2009

Date Written: January 16, 2009

Abstract

Why do some states default on their debt more often than others? We argue that sovereign default is the outcome of a political struggle among different groups of citizens. It is more likely to happen if: (i) domestic debt-holders are relatively weak; (ii) the political costs of the financial turmoil typically triggered by a sovereign bankrupcy are small. We show that these conditions are in turn more likely to be present if a country lacks a well-developed financial system and/or a sufficiently independent central bank.

Keywords: fiscal sustainability, political economy, bank runs, central bank independance, financial development

JEL Classification: E51, E52, H63

Suggested Citation

Giordano, Raffaela and Tommasino, Pietro, What Determines Debt Intolerance? The Role of Political and Monetary Institutions (January 16, 2009). Bank of Italy Temi di Discussione (Working Paper) No. 700. Available at SSRN: https://ssrn.com/abstract=1356605 or http://dx.doi.org/10.2139/ssrn.1356605

Raffaela Giordano

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Pietro Tommasino (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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