Abstract
Sovereigns' public and constraint influence sovereign debt crises and resolution. We compile a dataset on public expenditure composition around restructurings with private external creditors. We show that during restructurings, public investment (i) experiences severe decline and slow recovery, (ii) differs from public consumption and transfers, and (iii) relates with restructuring We develop a theoretical model of defaultable debt that embeds endogenous public accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows public investment dynamics and tight constraint delay debt settlement, i.e., capital accumulation delays and fiscal delays. Data support these theoretical predictions.
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