The political economy of sovereign debt overhang

Data set Tax and State

We propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions.

The political economy frictions involve a preference for immediate spending, while the contracting friction is a lack of commitment regarding foreign debt and expropriation. We show that the political economy frictions slow an economy’s convergence to the steady state due to the endogenous evolution of capital taxation. The model rationalizes why openness has different implications for growth depending on the political environment, why institutions such as the treatment of capital income evolve over time, why governments in countries that grow rapidly accumulate net foreign assets rather than liabilities, and why foreign aid may not affect growth.

The data can be downloaded directly from Github. The code is in Python 2.7. The data is in .csv. It includes a useful readme. File “”data_www.csv”” contains the raw data used for plots I and II of the paper. File “””” contains the Python code to generate plots I and II. File “”data_work_mathematica.m”” generates the same plots in Mathematica. File “””” contains the code to generate the speeds of convergence for the linearized model. File “””” contains the main code that runs the simulations of the model.