Table Of ContentDebt Default and Democracy
NEW THINKING IN POLITICAL ECONOMY
Series Editor: Peter J. Boettke, George Mason University, USA
New Thinking in Political Economy aims to encourage scholarship in the
intersection of the disciplines of politics, philosophy and economics. It has the
ambitious purpose of reinvigorating political economy as a progressive force for
understanding social and economic change.
The series is an important forum for the publication of new work
analysing the social world from a multidisciplinary perspective. With increased
specialization (and professionalization) within universities, interdisciplinary
work has become increasingly uncommon. Indeed, during the 20th century, the
process of disciplinary specialization reduced the intersection between economics,
philosophy and politics and impoverished our understanding of society. Modern
economics in particular has become increasingly mathematical and largely ignores
the role of institutions and the contribution of moral philosophy and politics.
New Thinking in Political Economy will stimulate new work that combines
technical knowledge provided by the ‘dismal science’ and the wisdom gleaned
from the serious study of the ‘worldly philosophy’. The series will reinvigorate our
understanding of the social world by encouraging a multidisciplinary approach to
the challenges confronting society in the new century.
Titles in the series include:
The International Monetary System and the Theory of Monetary Systems
Pascal Salin
Creative Destruction and the Sharing Economy
Uber as Disruptive Innovation
Henrique Schneider
Digitalization, Immigration and the Welfare State
Mårten Blix
The Political Economy of Public Debt
Three Centuries of Theory and Evidence
Richard M. Salsman
Public Policy, Productive and Unproductive Entrepreneurship
The Impact of Public Policy on Entrepreneurial Outcomes
Edited by Gregory M. Randolph, Michael T. Tasto and Robert F. Salvino Jr
Public Debt
An Illusion of Democratic Political Economy
Giuseppe Eusepi and Richard E. Wagner
Religion and Comparative Development
The Genesis of Democracy and Dictatorship
Theocharis Grigoriadis
Debt Default and Democracy
Edited by Giuseppe Eusepi and Richard E. Wagner
Debt Default and
Democracy
Edited by
Giuseppe Eusepi
Professor of Public Finance, Department of Law and
Economics of Productive Activities, Sapienza University of
Rome, Italy
Richard E. Wagner
Holbert L. Harris Professor of Economics, Department of
Economics, George Mason University, USA
NEW THINKING IN POLITICAL ECONOMY
Cheltenham, UK • Northampton, MA, USA
© Giuseppe Eusepi and Richard E. Wagner 2018
All rights reserved. No part of this publication may be reproduced, stored
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mechanical or photocopying, recording, or otherwise without the prior
permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
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Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2018931760
This book is available electronically in the
Economics subject collection
DOI 10.4337/9781788117937
ISBN 978 1 78811 792 0 (cased)
ISBN 978 1 78811 793 7 (eBook)
Typeset by Servis Filmsetting Ltd, Stockport, Cheshire
Contents
List of figures and tables vii
List of contributors ix
Preface xi
Acknowledgements xiii
PART I PUBLIC DEBT AND INDIVIDUAL RATIONALITY
1 De Viti de Marco vs. Ricardo on public debt: self-extinction or
default? 3
Giuseppe Eusepi and Richard E. Wagner
2 Governing the market for sovereign bailouts 17
Karsten Mause
3 Political obligations: is debt special? 36
Geoffrey Brennan
4 Debt default and the limits of the contractual imagination:
Pareto and Mosca meet Buchanan 51
Richard E. Wagner
PART II MACRO CONSEQUENCES AND IMPLICATIONS
OF PUBLIC DEBT
5 Political economy of government solvency: the institutional
framework for stability and sustainability 65
Andrea Rieck and Ludger Schuknecht
6 On some recent proposals of public debt restructuring in the
Eurozone 84
Ernesto Longobardi and Antonio Pedone
7 Economic governance in the euro area: balancing risk reduction
and risk sharing 124
Fabrizio Balassone, Sara Cecchetti, Martina Cecioni, Marika
Cioffi, Wanda Cornacchia, Flavia Corneli and Gabriele Semeraro
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vi Debt default and democracy
8 Adjustments in the balance sheets: is it normal, this ‘new
normal’? 155
Liviu Voinea, Alexie Alupoaiei, Florin Dragu and Florian Neagu
Index 190
Figures and tables
FIGURES
5.1 Public debt ratio of G7 countries in percentage of GDP 67
5.2 T otal debt by sector (excl. financial sector) in percentage
of GDP 68
5.3 C entral banks’ total assets in Latin American countries in
percentage of GDP 72
5.4 C entral banks’ total assets in advanced economies in
percentage of GDP 73
8.1 P anel results: the evolution of the probability of recession
for various debt levels 165
8A.1 C ountry results – Bulgaria: marginal effects on the
probability of recession for various debt levels 178
8A.2 C ountry results – Czech Republic: marginal effects on the
probability of recession for various debt levels 179
8A.3 C ountry results – Latvia: marginal effects on the
probability of recession for various debt levels 180
8A.4 C ountry results – Hungary: marginal effects on the
probability of recession for various debt levels 181
8A.5 C ountry results – Romania: marginal effects on the
probability of recession for various debt levels 182
8A.6 C ountry results – Slovenia: marginal effects on the
probability of recession for various debt levels 183
8A.7 E stimation of the long-run mean in real interest rates using
an Ornstein–Uhlenbeck model 184
8A.8 C alibration of the optimal public debt level using the asset
pricing approach 185
8A.9 C alibration of the optimal debt level for the non-financial
corporations sector using the asset pricing approach 186
8A.10 C alibration of the optimal debt level for the household
sector using the asset pricing approach 187
8A.11 C alibration of the optimal debt level for the external sector
using the asset pricing approach 188
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viii Debt default and democracy
8A.12 Calibration of the total optimal debt level using the asset
pricing approach 189
TABLES
6.1 G eneral government gross and net debt in some advanced
economies: 2007–16 90
6.2 G eneral government overall and primary balance in some
advanced economies: 2007–16 92
6.3 T he proposals for outstanding debt restructuring: the main
features 109
6.4 T he proposals of a permanent insolvency procedure for
sovereigns: the main features 116
8.1 C omparative results: Regression model (RM) vs. Asset
pricing model (AP) 164
8A.1 Summary statistics 172
8A.2 Correlation matrix of the main variables 173
8A.3 Logit estimation results 174
8A.4 Logit estimation results: robustness checks 175
8A.5 Marginal effects on the probability of recession 177
Contributors
Alexie Alupoaiei, Financial Stability Department, National Bank of
Romania, Bucharest, Romania
Fabrizio Balassone, Bank of Italy, Directorate General for Economics,
Statistics and Research, Rome, Italy
Geoffrey Brennan, Australian National University, Canberra, Australia;
Duke University, Durham, NC, USA; University of North Carolina,
Chapel Hill, NC, USA
Sara Cecchetti, Bank of Italy, Directorate General for Economics,
Statistics and Research, Rome, Italy
Martina Cecioni, Bank of Italy, Directorate General for Economics,
Statistics and Research, Rome, Italy
Marika Cioffi, Bank of Italy, Directorate General for Economics,
Statistics and Research, Rome, Italy
Wanda Cornacchia, Bank of Italy, Directorate General for Economics,
Statistics and Research, Rome, Italy
Flavia Corneli, Bank of Italy, Directorate General for Economics,
Statistics and Research, Rome, Italy
Florin Dragu, Financial Stability Department, National Bank of
Romania, Bucharest, Romania
Giuseppe Eusepi, Sapienza University of Rome, Rome, Italy
Ernesto Longobardi, Aldo Moro University of Bari, Bari, Italy
Karsten Mause, University of Münster, Münster, Germany
Florian Neagu, Financial Stability Department, National Bank of
Romania, Bucharest, Romania
Antonio Pedone, Sapienza University of Rome, Rome, Italy
Andrea Rieck, Federal Ministry of Finance, Berlin, Germany
Ludger Schuknecht, Federal Ministry of Finance, Berlin, Germany
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