Investment Cycles and Sovereign Debt Overhang

By Mark Aguiar, Manuel Amador, Gita Gopinath. 2007

163 citations recorded by the source corpus.

We characterize optimal taxation of foreign capital and optimal sovereign debt policy in a small open economy where the government cannot commit to policy and seeks to insure a risk averse domestic constituency. The expected tax on capital is shown to vary with the state of the economy, generating cyclicality in investment and debt in an environment where the first best capital stock is a constant. The government's lack of commitment induces a negative correlation between investment and the stock of government debt, a "debt overhang'' effect. If the government discounts the future at a rate higher than the market, then capital oscillates indefinitely at a level strictly below the first best. 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.

Subfields: Economics and Econometrics, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/967a07046c2de605c49e7d5722e5c0a40e9fccd6

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Citations in the corpus

Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis (2018, unknown): “Krugman (1988), Bulow and Rogoff (1991), and Aguiar et al. (2009)).”
Rethinking the Effects of Financial Globalization (2016, unknown): “8Other in uential papers include Cole and Kehoe (1997), Kletzer and Wright (2000), Wright (2002), Aguiar and Gopinath (2006), Amador (2008), Arellano (2008), Aguiar, Amador, and Gopinath (2009), and Bai and Zhang (2010).”
Capital Flows and Foreign Exchange Intervention (2019, unknown): “See for example Alvarez et al. (2009), Bacchetta and Van Wincoop (2010) and Maggiori (2013). Bruno and Shin (2014) develop a model of the international banking system where global and local funding constraints interact in the transmission of financial conditions across borders. Gabaix and Maggiori (”
Sovereign Debt Relief and its Aftermath (2016, methodology): “We again conduct a large number of robustness checks, focusing on our main ndings on post-Brady growth and credit ratings (columns (1) and (2) of Table 6).”
International Reserves and Rollover Risk (2013, unknown): “We model a reduction in political myopia as an increase in the time discount factor of the government, which is a common way to account for political economy aspects in emerging economies (Aguiar, Amador, and Gopinath 2009).”
The Pass-Through of Sovereign Risk (2016, background): “See also Aguiar et al. (2009) and Dovis (2013) for models where anticipation effects arise because of debt overhang problems.”
Public debt and growth: Heterogeneity and non-linearity (2015, background): “Non-linearities in the debt–growth nexus may also arise if there is a tipping point of fiscal sustainability: when debt is too high debt overhang could directly distort investment, as investors believe that the proceeds of any new project will be taxed away to service the pre-existing debt (Krugman,”