Debt default and democracy PDF
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Debt Default and Democracy NEW THINKING IN POLITICAL ECONOMY Series Editor: Peter J. Boettke, George Mason University, USA New Thinking in Political Economy aims to encourage scholarship in the intersection of the disciplines of politics, philosophy and economics. It has the ambitious purpose of reinvigorating political economy as a progressive force for understanding social and economic change. The series is an important forum for the publication of new work analysing the social world from a multidisciplinary perspective. With increased specialization (and professionalization) within universities, interdisciplinary work has become increasingly uncommon. Indeed, during the 20th century, the process of disciplinary specialization reduced the intersection between economics, philosophy and politics and impoverished our understanding of society. Modern economics in particular has become increasingly mathematical and largely ignores the role of institutions and the contribution of moral philosophy and politics. New Thinking in Political Economy will stimulate new work that combines technical knowledge provided by the ‘dismal science’ and the wisdom gleaned from the serious study of the ‘worldly philosophy’. The series will reinvigorate our understanding of the social world by encouraging a multidisciplinary approach to the challenges confronting society in the new century. Titles in the series include: The International Monetary System and the Theory of Monetary Systems Pascal Salin Creative Destruction and the Sharing Economy Uber as Disruptive Innovation Henrique Schneider Digitalization, Immigration and the Welfare State Mårten Blix The Political Economy of Public Debt Three Centuries of Theory and Evidence Richard M. Salsman Public Policy, Productive and Unproductive Entrepreneurship The Impact of Public Policy on Entrepreneurial Outcomes Edited by Gregory M. Randolph, Michael T. Tasto and Robert F. Salvino Jr Public Debt An Illusion of Democratic Political Economy Giuseppe Eusepi and Richard E. Wagner Religion and Comparative Development The Genesis of Democracy and Dictatorship Theocharis Grigoriadis Debt Default and Democracy Edited by Giuseppe Eusepi and Richard E. Wagner Debt Default and Democracy Edited by Giuseppe Eusepi Professor of Public Finance, Department of Law and Economics of Productive Activities, Sapienza University of Rome, Italy Richard E. Wagner Holbert L. Harris Professor of Economics, Department of Economics, George Mason University, USA NEW THINKING IN POLITICAL ECONOMY Cheltenham, UK • Northampton, MA, USA © Giuseppe Eusepi and Richard E. Wagner 2018 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2018931760 This book is available electronically in the Economics subject collection DOI 10.4337/9781788117937 ISBN 978 1 78811 792 0 (cased) ISBN 978 1 78811 793 7 (eBook) Typeset by Servis Filmsetting Ltd, Stockport, Cheshire Contents List of figures and tables vii List of contributors ix Preface xi Acknowledgements xiii PART I PUBLIC DEBT AND INDIVIDUAL RATIONALITY 1 De Viti de Marco vs. Ricardo on public debt: self-extinction or default? 3 Giuseppe Eusepi and Richard E. Wagner 2 Governing the market for sovereign bailouts 17 Karsten Mause 3 Political obligations: is debt special? 36 Geoffrey Brennan 4 Debt default and the limits of the contractual imagination: Pareto and Mosca meet Buchanan 51 Richard E. Wagner PART II MACRO CONSEQUENCES AND IMPLICATIONS OF PUBLIC DEBT 5 Political economy of government solvency: the institutional framework for stability and sustainability 65 Andrea Rieck and Ludger Schuknecht 6 On some recent proposals of public debt restructuring in the Eurozone 84 Ernesto Longobardi and Antonio Pedone 7 Economic governance in the euro area: balancing risk reduction and risk sharing 124 Fabrizio Balassone, Sara Cecchetti, Martina Cecioni, Marika Cioffi, Wanda Cornacchia, Flavia Corneli and Gabriele Semeraro v vi Debt default and democracy 8 Adjustments in the balance sheets: is it normal, this ‘new normal’? 155 Liviu Voinea, Alexie Alupoaiei, Florin Dragu and Florian Neagu Index 190 Figures and tables FIGURES 5.1 Public debt ratio of G7 countries in percentage of GDP 67 5.2 T otal debt by sector (excl. financial sector) in percentage of GDP 68 5.3 C entral banks’ total assets in Latin American countries in percentage of GDP 72 5.4 C entral banks’ total assets in advanced economies in percentage of GDP 73 8.1 P anel results: the evolution of the probability of recession for various debt levels 165 8A.1 C ountry results – Bulgaria: marginal effects on the probability of recession for various debt levels 178 8A.2 C ountry results – Czech Republic: marginal effects on the probability of recession for various debt levels 179 8A.3 C ountry results – Latvia: marginal effects on the probability of recession for various debt levels 180 8A.4 C ountry results – Hungary: marginal effects on the probability of recession for various debt levels 181 8A.5 C ountry results – Romania: marginal effects on the probability of recession for various debt levels 182 8A.6 C ountry results – Slovenia: marginal effects on the probability of recession for various debt levels 183 8A.7 E stimation of the long-run mean in real interest rates using an Ornstein–Uhlenbeck model 184 8A.8 C alibration of the optimal public debt level using the asset pricing approach 185 8A.9 C alibration of the optimal debt level for the non-financial corporations sector using the asset pricing approach 186 8A.10 C alibration of the optimal debt level for the household sector using the asset pricing approach 187 8A.11 C alibration of the optimal debt level for the external sector using the asset pricing approach 188 vii viii Debt default and democracy 8A.12 Calibration of the total optimal debt level using the asset pricing approach 189 TABLES 6.1 G eneral government gross and net debt in some advanced economies: 2007–16 90 6.2 G eneral government overall and primary balance in some advanced economies: 2007–16 92 6.3 T he proposals for outstanding debt restructuring: the main features 109 6.4 T he proposals of a permanent insolvency procedure for sovereigns: the main features 116 8.1 C omparative results: Regression model (RM) vs. Asset pricing model (AP) 164 8A.1 Summary statistics 172 8A.2 Correlation matrix of the main variables 173 8A.3 Logit estimation results 174 8A.4 Logit estimation results: robustness checks 175 8A.5 Marginal effects on the probability of recession 177 Contributors Alexie Alupoaiei, Financial Stability Department, National Bank of Romania, Bucharest, Romania Fabrizio Balassone, Bank of Italy, Directorate General for Economics, Statistics and Research, Rome, Italy Geoffrey Brennan, Australian National University, Canberra, Australia; Duke University, Durham, NC, USA; University of North Carolina, Chapel Hill, NC, USA Sara Cecchetti, Bank of Italy, Directorate General for Economics, Statistics and Research, Rome, Italy Martina Cecioni, Bank of Italy, Directorate General for Economics, Statistics and Research, Rome, Italy Marika Cioffi, Bank of Italy, Directorate General for Economics, Statistics and Research, Rome, Italy Wanda Cornacchia, Bank of Italy, Directorate General for Economics, Statistics and Research, Rome, Italy Flavia Corneli, Bank of Italy, Directorate General for Economics, Statistics and Research, Rome, Italy Florin Dragu, Financial Stability Department, National Bank of Romania, Bucharest, Romania Giuseppe Eusepi, Sapienza University of Rome, Rome, Italy Ernesto Longobardi, Aldo Moro University of Bari, Bari, Italy Karsten Mause, University of Münster, Münster, Germany Florian Neagu, Financial Stability Department, National Bank of Romania, Bucharest, Romania Antonio Pedone, Sapienza University of Rome, Rome, Italy Andrea Rieck, Federal Ministry of Finance, Berlin, Germany Ludger Schuknecht, Federal Ministry of Finance, Berlin, Germany ix
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