## Sovereign Debt Sustainability and Redistribution

_IMF Working Papers, March 6, 2026_

## Source details

**Canonical URL:** [Sovereign Debt Sustainability and Redistribution](https://www.imf.org/en/publications/wp/issues/2026/03/06/sovereign-debt-sustainability-and-redistribution-574521)

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## Bibliographic details
- Authors: Monica Tran-Xuan
- Published: March 6, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229039055.001

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### 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

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2026/03/06/sovereign-debt-sustainability-and-redistribution-574521_