Fiscal adjustments and sovereign default in different government systems

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Economics from the NOVA – School of Business and Economics

This paper extends the model of Spolaore (2004) about adjustments in di erent government systems for the context of scal adjustments and sovereign default. We introduce asymmetry between groups in income and preferences towards fiscal reforms. Default affects differently each group and becomes a possibility if reforms are not enacted after public finance solvency shocks, in influencing the political game according to its likelihood. With the extensions, new situations which were not possible with the previous framework arise. After the exposition of the model, the Argentine default in 2001 provides an example of the political conflicts addressed by the model.