This paper develops a sovereign default model with capital accumulation, long-term debt, and fiscal rules with two distortions: debt dilution and private underinvestment. Fiscal rules generate a long-run economic expansion because they mitigate default risk caused by dilution, which increases...

The article examines how the European Commission's proposal to reform the Stability and Growth Pact (SGP) in terms of the pace of public debt reduction may affect basic economic parameters, such as GDP, consumption and investment levels, as well as fiscal parameters like the scale of subsidies...

Political risk is a significant determinant of bond yields and economic growth in both developed and emerging markets and we develop a debt sustainability analysis model with both channels using a country ratings proxy of political risk. Political risk also affects a sovereign's willingness to...