Sovereign Debt Sustainability and Redistribution
IMF Working Papers, March 6, 2026
Source details
- Canonical URL
- Sovereign Debt Sustainability and Redistribution
Other formats
Bibliographic details
- Authors: Monica Tran-Xuan
- Published: March 6, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229039055.001
Research question and model setup
- Develops a theory of sovereign debt sustainability driven by the government’s motive for redistribution.
- Studies a heterogeneous-agent small open economy in which:
- Redistribution relies on distortionary labor taxation.
- The government lacks commitment in its fiscal policies.
- Access to international credit markets vs. default into financial autarky determines the cost of redistribution and creates an endogenous cost of default.
Key findings (theoretical and quantitative)
- Access to international credit markets lowers the cost of redistribution.
- Default into financial autarky raises the cost of redistribution, generating an endogenous cost of default.
- The model quantitatively accounts for:
- The buildup of Italy’s external debt.
- The positive cross-country correlation between pre-tax income inequality and external debt.
- Optimal austerity is more gradual when distributional concerns are present.
Subject areas and keywords
- Subjects: Consumption, Debt sustainability, External debt, Income inequality, National accounts, Public debt
- Keywords: Consumption, cost of redistribution, Debt sustainability, debt-sustainability result, Income inequality, Inequality, Limited commitment, open economy, Optimal taxation, Redistribution, Sovereign debt
Content in this bundle
- Working Paper