I am an undergraduate student who does some research on sovereign debt and its sustainability.
Which papers are essential to understand how sovereign debt works and which implication it has for the economic policy of the country?
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Carmen Reinhart from Harvard Kennedy School works extensively on these questions. She has a recent paper forthcoming in the Journal of the European Economic Association, 2016, entitled "Sovereign Debt Relief and its Aftermath" with Christoph Trebesch. They study sovereign debt relief in a long-term perspective, using two distinct samples: 1920-1939, and 1978-2010. They published a short Vox-CEPR column on this research.
In their book, with Kenneth Rogoff, "This time is different" they address this question. They have also other interesting and good papers:
I don't know a great deal about this area. But in terms of the European Sovereign Debt Crisis, you might wish to review Philip Lanes research on the topic. I'm sure there are others too, maybe his co-authors on papers etc, you could look at their papers too. For example, there is one in the Journal of Economic Perspectives in 2012 called "The European Sovereign Debt Crisis". It's a nice one to read, at least I thought so anyway!
A lot of the current work done about debt sustainability analysis uses fiscal policy reaction functions in different ways.
Interesting papers on this subject are:
[Bohn2005] Bohn, H. (2005). The Sustainability of Fiscal Policy in the United States.
[Medeiros2012] Medeiros, J. (2012). Stochastic debt simulation using VAR models and a a panel fiscal reaction function: results for a selected number of countries. European Economy. Economic Papers, July 2012(459).
[Ghosh et al.2013] Ghosh, A. R., Kim, J. I., Mendoza, E. G., Ostry, J. D., and Qureshi, M. S. (2013). Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies. The Economic Journal, 123:4–30.
The first and the third one use fiscal reaction functions explicitely. The middle one used this reaction function to similate how debt could evolve over time.