Investment Cycles and Sovereign Debt Overhang

DSpace/Manakin Repository

Investment Cycles and Sovereign Debt Overhang

Citable link to this page

 

 
Title: Investment Cycles and Sovereign Debt Overhang
Author: Aguiar, Mark; Amador, Manuel; Gopinath, Gita

Note: Order does not necessarily reflect citation order of authors.

Citation: Aguiar, Mark, Manuel Amador, and Gita Gopinath. 2008. Investment cycles and sovereign debt overhang. Review of Economic Studies 76(1): 1-31.
Full Text & Related Files:
Abstract: We characterize optimal taxation of foreign capital and optimal sovereign debt policy in a small open economy where the government cannot commit to policy, seeks to insure a risk averse domestic constituency, and is more impatient than the market. Optimal policy generates long-run cycles in both sovereign debt and foreign direct investment in an environment in which the first best capital stock is a constant. The expected tax on capital endogenously varies with the state of the economy and in- vestment is distorted by more in recessions than in booms amplifying the effect of shocks. The government’s lack of commitment induces a negative correlation between investment and the stock of government debt, a "debt overhang" effect. Debt relief is never Pareto improving and cannot affect the long-run level of investment. Further, restricting the government to a balanced budget can eliminate the cyclical distortion of investment.
Published Version: http://dx.doi.org/10.1111/j.1467-937X.2008.00523.x
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:11988004
Downloads of this work:

Show full Dublin Core record

This item appears in the following Collection(s)

 
 

Search DASH


Advanced Search
 
 

Submitters