Defaulting on Covid debt

Paczos, Wojtek ORCID: https://orcid.org/0000-0002-8129-0235 and Shakhnov, Kirill 2022. Defaulting on Covid debt. Journal of International Financial Markets, Institutions and Money 77 , 101516. 10.1016/j.intfin.2022.101516

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Abstract

The COVID-19 pandemic causes sharp reductions in economic output and sharp increases in government expenditures. These increase the riskiness of sovereign debts, especially in emerging economies. This paper proposes a framework to study debt sustainability. The economy is subject to productivity and expenditure shock. The government sets distortionary labour taxes and decides whether to repay its past domestic and foreign obligations. Foreign default is more likely after a negative productivity shock, while domestic default is more likely after a negative expenditure shock. This mechanism finds support in the data. Recent proposals that would ease the burden of foreign debt after COVID-19 would not prevent a wave of domestic defaults.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HJ Public Finance
Additional Information:	This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
Publisher:	Elsevier
ISSN:	1042-4431
Date of First Compliant Deposit:	18 May 2022
Date of Acceptance:	9 January 2022
Last Modified:	08 May 2023 04:27
URI:	https://orca.cardiff.ac.uk/id/eprint/149826

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