Tag Archives: Politico-economic equilibrium

“Sovereign Debt with Heterogeneous Creditors,” JIE, 2016

Journal of International Economics 99(S1), March 2016, with Harris Dellas. PDF.

We develop a sovereign debt model with heterogeneous creditors (private and official) where the probability of default depends on both the level and the composition of debt. Higher exposure to official lenders improves incentives to repay due to more severe sanctions but it is also costly because it lowers the value of the sovereign’s default option. The model can account for the co-existence of private and official lending, the time variation in their shares in total debt as well as the low rates charged on both. It also produces intertwined default and debt-composition choices.

“Politico-Economic Equivalence,” RED, 2015

Review of Economic Dynamics 18(4), October 2015, with Martín Gonzalez-Eiras. PDF.

Traditional “economic equivalence” results, like the Ricardian equivalence proposition, define equivalence classes over exogenous policies. We derive “politico-economic equivalence” conditions that apply in environments where policy is endogenous and chosen sequentially. A policy regime and a state are equivalent to another such pair if both pairs give rise to the same allocation in politico-economic equilibrium. The equivalence conditions help to identify factors that render institutional change non-neutral and to construct politico-economic equilibria in new policy regimes. We exemplify their use in the context of several applications, relating to social security reform, tax-smoothing policies and measures to correct externalities.

“Debt Maturity Without Commitment,” JME, 2014

Journal of Monetary Economics 68(S), December 2014. PDF.

How does sovereign risk shape the maturity structure of public debt? We consider a government that balances benefits of default, due to tax savings, and costs, due to output losses. Debt issuance affects subsequent default and rollover decisions and thus, current debt prices. This induces welfare costs beyond the consumption smoothing benefits from the marginal unit of debt. The equilibrium maturity structure minimises these welfare costs. It is interior with positive gross positions and shortens during times of crisis and low output, consistent with empirical evidence.

“Riskante Renten (Risky Entitlements),” FuW, 2013

Finanz und Wirtschaft, January 5, 2013. PDF. Ökonomenstimme, January 8, 2013. HTML.

  • Future pension benefits will reflect future national income, and how generations share it.
  • Future income depends on current savings and thus, the structure of the pension system.
  • How the income is shared depends on political factors, not promises.

“Economic and Politico-Economic Equivalence,” CEPR, 2012

CEPR Discussion Paper 9203, November 2012, with Martín Gonzalez-Eiras. PDF.

We extend “economic equivalence” results, like the Ricardian equivalence proposition, to the political sphere where policy is chosen sequentially. We derive conditions under which a policy regime (summarizing admissible policy choices in every period) and a state are “politico-economically equivalent” to another such pair, in the sense that both pairs give rise to the same equilibrium allocation. The equivalence conditions help to identify factors that render institutional change non-neutral. We exemplify their use in the context of several applications, relating to social security reform, tax-smoothing policies and measures to correct externalities.

“Ageing, Government Budgets, Retirement and Growth,” EER, 2012

European Economic Review 56(1), January 2012, with Martín Gonzalez-Eiras. PDF.

We analyze the short and long run effects of demographic ageing—increased longevity and reduced fertility—on per-capita growth. The OLG model captures direct effects, working through adjustments in the savings rate, labor supply, and capital deepening, and indirect effects, working through changes of taxes, government spending components and the retirement age in politico-economic equilibrium. Growth is driven by capital accumulation and productivity increases fueled by public investment. The closed-form solutions of the model predict taxation and the retirement age in OECD economies to increase in response to demographic ageing and per-capita growth to accelerate. If the retirement age were held constant, the growth rate in politico-economic equilibrium would essentially remain unchanged, due to a surge of social security transfers and crowding out of public investment.

(Unfortunately, the acknowledgements got lost in the publishing process.) For comments, we thank Casper van Ewijk, Enrique Kawamura, George McCandless, Alex Monge, Vincenzo Quadrini, Jaume Ventura, Fabrizio Zilibotti as well as conference and seminar participants at Banco Central de la Republica Argentina, CREI (Universidad Pompeu Fabra), EEA annual meeting, EPRU (University of Copenhagen), ESSIM, IIES (Stockholm University), Netspar, Penn State, SED annual meeting, Study Center Gerzensee, and Universidad de San Andres. Andreas Walchli provided valuable research assistance.

“Bedroht der demografische Wandel die Produktivität? (Does Population Ageing Lower Productivity Growth?),” NZZ, 2011

Neue Zürcher Zeitung, November 16, 2011. PDF. Ökonomenstimme, November 16, 2011. HTML.

  • The economics is not as worrying as many believe.
  • But the politics is.

“The Future of Social Security,” JME, 2008

Journal of Monetary Economics 55(2), March 2008, with Martín Gonzalez-Eiras. PDF.

We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the standard OLG model with capital accumulation, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16%. Other policies that distort labor supply will become less important; labor supply therefore will rise, in contrast with frequently voiced fears.