ONLINE: Seminar in Macroeconomics - Fiscal Expenditure Consolidation and Sovereign Debt Relief: Front-loaded or Back-loaded
Time
Monday, 19. April 2021
17:00 - 18:15
Location
online
Organizer
Chair of International Economics and Political Economy
Speaker:
Tamon Asonuma (International Monetary Fund)
Due to the time difference between the U.S. and Germany, the seminar will start at 17:00 CET.
Fiscal Expenditure Consolidation and Sovereign Debt Relief: Front-loaded or Back-loaded
(with Hyungseok Joo)
Abstract: Sovereigns implement front-loaded fiscal expenditure consolidation prior to preemptive restructurings, while back-loaded consolidation upon defaults/post-default restructurings. We show that public investment (i) declines sharply prior to preemptive restructurings and recovers after settlement, (ii) declines sharply upon post-default restructurings and recovers before settlement, (iii) recovers quickly in preemptive episodes. We develop a theoretical model of defaultable debt that embeds endogenous choice of preemptive and post-default renegotiations, public capital accumulation, and expenditure composition. The model quantitatively shows the sovereign's voluntary commitment to front-loaded consolidation results in preemptive restructurings achieving quick public investment recovery and debt settlement. Data support these theoretical predictions