Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
10226785 | Journal of Economic Dynamics and Control | 2018 | 50 Pages |
Abstract
In this paper, we study how income inequality matters for government borrowing and default decisions. We extend a standard endogenous sovereign debt default model to allow for heterogeneous agents and stochastic variability in the dispersion of income. We calibrate the model to match a number of stylized facts for Argentina. We show that (i) rising income inequality within a country increases the probability of default significantly; (ii) the effect of output shocks is larger than the effect of inequality shocks; (iii) the joint effect of these two shocks can generate a high default probability consistent with the Argentine data; (iv) the model can match the high volatility of consumption by the poor relative to the rich; and (v) more progressive income taxes lead to lower default risk.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Kiyoung Jeon, Zeynep Kabukcuoglu,