When is Sovereign Debt Odious? A Theory of Government Repression, Growth Traps, and Growth Boosts

80 Pages Posted: 11 Aug 2022

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - New York University

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Jack Shim

New York University, Department of Finance, Students

Date Written: August 8, 2022

Abstract

We examine the dynamics of a country’s growth, consumption, and sovereign debt, assuming that the government is myopic and wants to maximize short-term, self-interested spending. Surprisingly, government myopia can increase a country’s access to external borrowing. In turn, access to borrowing can extend the government’s effective horizon; the government’s ability to borrow hinges on it convincing creditors they will be repaid, which gives it a stake in generating future revenues. In a high-saving country, the lengthening of the government’s effective horizon can incentivize it to tax less, resulting in a 'growth boost', with higher steady-state household consumption than if it could not borrow. However, in a country that saves little, the government may engage in more repressive policies to enhance its debt capacity. This could lead to a 'growth trap' where household steady-state consumption is lower than if the government had no access to debt. We discuss the effectiveness of alternative debt policies, including declaring debt odious, debt forgiveness, and debt ceilings. We also analyse the impact of unanticipated shocks on the country’s welfare.

JEL Classification: A0, A1, A11, A13, A14, F0, F02, G0, G00, L0, O0, P0

Suggested Citation

Acharya, Viral V. and Rajan, Raghuram G. and Shim, Jack, When is Sovereign Debt Odious? A Theory of Government Repression, Growth Traps, and Growth Boosts (August 8, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 106, 2022, Available at SSRN: https://ssrn.com/abstract=4187173 or http://dx.doi.org/10.2139/ssrn.4187173

Viral V. Acharya

New York University (NYU) - New York University ( email )

Raghuram G. Rajan (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)

International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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773-702-9299 (Phone)
773-702-0458 (Fax)

Jack Shim

New York University, Department of Finance, Students ( email )

New York, NY
United States

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