Working Paper: NBER ID: w21456
Authors: Cristina Arellano; Andrew Atkeson; Mark Wright
Abstract: The recent debt crises in Europe and the U.S. states feature similar sharp increases in spreads on government debt but also show important differences. In Europe, the crisis occurred at high government indebtedness levels and had spillovers to the private sector. In the United States, state government indebtedness was low, and the crisis had no spillovers to the private sector. We show theoretically and empirically that these different debt experiences result from the interplay between differences in the ability of governments to interfere in private external debt contracts and differences in the flexibility of state fiscal institutions.
Keywords: debt crises; government interference; fiscal flexibility
JEL Codes: F3; H7; K1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government interference in private external debt contracts (F34) | external debt crises (F34) |
| fiscal flexibility (E62) | public debt sustainability (H63) |
| sovereign interference (H13) | private credit ratings (G21) |
| higher government indebtedness levels (H63) | external debt crises (F34) |
| lower indebtedness and restrictions on interference (G28) | public debt crises (H63) |
| constitutional limitations (K10) | public debt intolerance (H63) |
| greater fiscal flexibility and higher capacity for sovereign interference (E62) | both public and external debt crises (F34) |
| fiscal flexibility and limited interference (E62) | avoidance of both types of crises (H12) |