Ricardian Equivalence, Foreign Debt and Sovereign Default Risk
54 Pages Posted: 27 Jan 2017 Last revised: 12 Sep 2019
Date Written: September 1, 2019
We study the impact of sovereign solvency on the private-public savings offset. Using data on 80 economies for 1989–2010, we find robust evidence for a U-shaped pattern in the private-public savings offset in sovereign credit ratings. While the 1:1 savings offset implied by Ricardian Equivalence holds approximately at intermediate levels of sovereign solvency, cyclically adjusted fiscal deficits are not offset by private savings at extremely low and high levels of sovereign solvency. Particularly, the U-shaped pattern is an emerging market phenomenon; additionally, it is confirmed when considering foreign currency rating and external public debt, but not for domestic currency rating and domestic public debt. For considerable foreign ownership of sovereign bonds, sovereign default constitutes a net wealth gain for domestic consumers.
Keywords: Fiscal Policy, Sovereign Default Risk, Ricardian Equivalence, Private Saving, External Public Debt, Emerging Markets
JEL Classification: E21, E62, F40, G01, H60
Suggested Citation: Suggested Citation