Endogenous Default- Why and when do Countries with Fixed Exchange Rate Regimes Decide to Default? (CROSBI ID 633235)
Prilog sa skupa u zborniku | izvorni znanstveni rad | međunarodna recenzija
Podaci o odgovornosti
Malenica, Ante ; Nadoveza, Ozana ; Fučkar, Karla ; Bukvić, Vedran
engleski
Endogenous Default- Why and when do Countries with Fixed Exchange Rate Regimes Decide to Default?
In this paper, the authors try to explain why and when it is rational for the government of a country with an overvalued exchange rate to refuse gradual depreciation and to default. The model is based on the following assumptions. Policy makers seek to maximize (re)election probabilities by evaluating the utility functions of households and firms. In addition, to win the votes of households the government must also gain their trust and remain credible. The credibility is based on the government’s ability to keep election promises which include: a fixed exchange rate, refraining from default, provision of public goods and maintaining reasonable tax rates. In a situation of budget deficit, government borrows from the international market. A growing need for financing increases the country’s risk and raises the lending interest rates, which in turn reduces both the gross domestic product and the income of households. The model suggests that policy makers decide to default when the probability of re-election is higher in case of default than in case of maintaining credibility. The model sets the basis for the above mentioned dynamics, which is in line with the stylized facts, and allows for comparative statics exercises.
endogenous default ; policy credibility ; (re)election probability ; fixed exchange rate
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Podaci o prilogu
115-136.
2015.
objavljeno
Podaci o matičnoj publikaciji
Challenges of Europe: Growth, competitiveness and inequality
Pavić, Ivan ; Muštra, Vinko
Split: Ekonomski fakultet Sveučilišta u Splitu
Podaci o skupu
11th International Conference Challenges of Europe: Growth, competitiveness and inequality
predavanje
27.05.2015-29.05.2015
Hvar, Hrvatska