Power-law distribution in the external debt-to-fiscal revenue ratios: Empirical evidence and a theoretical model

Gilles Dufrénot (1) , Anne-Charlotte Paret (2)

1 AMSE - Aix-Marseille Sciences Economiques
2 ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique

This paper provides evidence that the external debt-to-fiscal revenue ratio in emerging countries follows a power-law distribution. Such a distribution reflects the fact that external debt distress or debt crises correspond to extreme events that have been found to happen fairly often. We formally test the hypothesis of a power-law, going further than the usual visual inspection of the distribution of the variable of interest on a doubly logarithmic scale. We also show that such a distribution can be derived from a theoretical model in which uncertainty comes from tax evasion and corruption. Using the framework of an optimal stochastic growth model, we model the external debt-to-fiscal revenue ratio as a diffusion process for which the stochastic steady state distribution is derived using the properties of Itô diffusion processes.

Keywords: Power-law Stochastic growth External debt Emerging countries

Domains: Humanities and Social Sciences; Economics and Finance

Gilles Dufrénot, Anne-Charlotte Paret. Power-law distribution in the external debt-to-fiscal revenue ratios: Empirical evidence and a theoretical model. Journal of Macroeconomics, 2019, 60, pp.341-359. ⟨10.1016/j.jmacro.2019.04.002⟩. ⟨hal-02158001⟩