{
  "title": "Sovereign Debt Sustainability and Redistribution",
  "publication": "IMF Working Papers, March 6, 2026",
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  "summary": "This paper develops a theory of sovereign debt sustainability driven by the government’s motive for redistribution. It studies a heterogeneous-agent small open economy in which redistribution relies on distortionary labor taxation and the government lacks commitment in its fiscal policies.",
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    {
      "heading": "Research question and model setup",
      "content": "- Develops a theory of sovereign debt sustainability driven by the government’s motive for redistribution.\n- Studies a heterogeneous-agent small open economy in which:\n  - Redistribution relies on distortionary labor taxation.\n  - The government lacks commitment in its fiscal policies.\n  - Access to international credit markets vs. default into financial autarky determines the cost of redistribution and creates an endogenous cost of default."
    },
    {
      "heading": "Key findings (theoretical and quantitative)",
      "content": "- Access to international credit markets lowers the cost of redistribution.\n- Default into financial autarky raises the cost of redistribution, generating an endogenous cost of default.\n- The model quantitatively accounts for:\n  - The buildup of Italy’s external debt.\n  - The positive cross-country correlation between pre-tax income inequality and external debt.\n- Optimal austerity is more gradual when distributional concerns are present."
    },
    {
      "heading": "Subject areas and keywords",
      "content": "- Subjects: Consumption, Debt sustainability, External debt, Income inequality, National accounts, Public debt\n- Keywords: Consumption, cost of redistribution, Debt sustainability, debt-sustainability result, Income inequality, Inequality, Limited commitment, open economy, Optimal taxation, Redistribution, Sovereign debt\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2026/03/06/sovereign-debt-sustainability-and-redistribution-574521"
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    "Authors: Monica Tran-Xuan",
    "Published: March 6, 2026",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798229039055.001",
    "Develops a theory of sovereign debt sustainability driven by the government’s motive for redistribution.",
    "Studies a heterogeneous-agent small open economy in which:",
    "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:",
    "Optimal austerity is more gradual when distributional concerns are present.",
    "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",
    "**Working Paper**"
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