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A Theory of Debt Accumulation and Deficit Cycles
En savoir plusAbstractThis paper introduces a tractable model of sovereign debt in which governments face intertemporal tradeoffs between (i) preferring more primary deficits to less and (ii) avoiding costly defaults. Governments run deficits when debt and, then, the marginal costs of increasing debt are low. After an extended period of debt accumulation, the probability of default increases,…