Sovereign debt issuance and selective default

Shakhnov, Kirill and Paczos, Wojtek ORCID: https://orcid.org/0000-0002-8129-0235 2026. Sovereign debt issuance and selective default. Macroeconomic Dynamics 30 , e19. 10.1017/s1365100525100825

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Abstract

Sovereigns issue debt on both domestic and foreign markets and when they default, they default mostly selectively. We propose a theory to rationalize these observations. A government chooses the optimal combination of two debts to smooth consumption, which is subject to output shock and volatile tax distortions. In equilibrium, it mostly relies on domestic debt to smooth the tax wedge and on foreign debt to smooth the output shock. Issuing either debt is less costly than raising taxes, but it is subject to default risk due to the government’s limited commitment. A quantitative, calibrated model with two shocks and two debts replicates well debt-to-GDP ratios, default frequencies, cyclical properties of emerging economies and behavior of aggregates around default episodes.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Schools > Business (Including Economics)
Additional Information:	License information from Publisher: LICENSE 1: URL: https://creativecommons.org/licenses/by/4.0/, Type: open-access
Publisher:	Cambridge University Press
ISSN:	1365-1005
Date of First Compliant Deposit:	17 March 2026
Last Modified:	17 Mar 2026 14:45
URI:	https://orca.cardiff.ac.uk/id/eprint/185815

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