Study reveals when governments may strategically default on domestic debt
Infrequent domestic sovereign debt defaults can be beneficial for governments when distributional incentives are considered. A model shows that defaulting can be optimal for a government that needs to bridge the gap between unpredictable spending and fixed taxes. Repaying debt allows access to more borrowing but increases future tax needs, while defaulting can benefit poorer individuals over wealthier ones. This model supports realistic debt levels and default frequencies.