Debt Default and Democracy
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Debt Default and Democracy

Edited by Giuseppe Eusepi and Richard E. Wagner

The original chapters in this book connect the microeconomic and macroeconomic approaches to public debt. Through their thought-provoking views, leading scholars offer insights into the incentives that individuals and governments may have in resorting to public debt, thereby promoting a clearer understanding of its economic consequences.
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Chapter 2: Governing the market for sovereign bailouts

Karsten Mause

Abstract

There is a public debate and large body of politico-economic literature discussing the design of fiscal rules and other instruments of fiscal governance assumed to prevent solvency problems and bailouts of countries. Essentially and implicitly, this literature discusses the issue of how to regulate the ‘demand side’ of the ‘market’ for sovereign bailouts. This chapter complements this strand of research by discussing the possibilities and limitations of regulating the ‘supply side’ of this market (namely, governments, central banks, and international organizations in their role as potential rescuers). Thinking about the governance of this market makes sense because well-intentioned sovereign bailouts may have serious side-effects, such as the ‘moral hazard problem’ and the ‘soft budget constraint problem’. Finally, it is discussed whether the citizens of potential ‘rescuer-jurisdictions’ should get the opportunity to vote in a binding referendum on whether ‘to bail out, or not to bail out?’

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