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Public debt, sovereign default risk and shadow economy

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  • Elgin, Ceyhun
  • Uras, Burak R.

Abstract

This paper analyzes the interactions between government's indebtedness, sovereign default risk and the size of the informal sector. We test an underlying theory that suggests that in societies with limited tax enforcement, the presence of informality constrains the set of pledgeable fiscal policy alternatives, increases public debt and the implied probability of sovereign debt restructuring. The hypotheses that we test in our empirical analysis are: a larger size of the informal sector is associated with (1) higher public indebtedness, (2) higher interest rates paid on sovereign debt, (3) a higher level of financial instability and (4) a higher probability of sovereign default. The empirical results from cross-country panel regressions show that after controlling for previously highlighted variables in the literature that could explain the variation in financial instability, sovereign default risk and public indebtedness, the size of informality remains as a significant determinant of these variables.

Suggested Citation

  • Elgin, Ceyhun & Uras, Burak R., 2013. "Public debt, sovereign default risk and shadow economy," Journal of Financial Stability, Elsevier, vol. 9(4), pages 628-640.
    • Handle: RePEc:eee:finsta:v:9:y:2013:i:4:p:628-640
    DOI: 10.1016/j.jfs.2012.09.002
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    More about this item

    Keywords

    Informal sector; Public debt; Sovereign yields;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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