Ricardian Equivalence, Foreign Debt and Sovereign Default Risk

54 Pages Posted: 27 Jan 2017 Last revised: 12 Sep 2019

See all articles by Stefan Eichler

Stefan Eichler

Leibniz Universität Hannover; Halle Institute for Economic Research

Ju Hyun Pyun

Korea University Business School (KUBS)

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

Eichler, Stefan and Pyun, Ju Hyun, Ricardian Equivalence, Foreign Debt and Sovereign Default Risk (September 1, 2019). Available at SSRN: https://ssrn.com/abstract=2906312 or http://dx.doi.org/10.2139/ssrn.2906312

Stefan Eichler

Leibniz Universität Hannover

Institute of Money and International Finance
Koenigsworther Platz 1
Hannover, 30167

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108

Ju Hyun Pyun (Contact Author)

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul, 136701

HOME PAGE: http://sites.google.com/site/juhyunpyun/home

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