Sovereign Risk, Fiscal Policy, and Macroeconomic Stability

By Keith Kuester, Gernot Mueller, Giancarlo Corsetti, André Meier. Social Science Research Network, 2013

448 citations recorded by the source corpus.

This paper analyzes the impact of strained government finances on macroeconomic stability and the transmission of fiscal policy. Using a variant of the model by Curdia and Woodford (2009), we study a 'sovereign risk channel' through which sovereign default risk raises funding costs in the private sector. If monetary policy is constrained, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy may become self-fulfilling. In addition, sovereign risk amplifies the effects of negative cyclical shocks. Under those conditions, fiscal retrenchment can help curtail the risk of macroeconomic instability and, in extreme cases, even stimulate economic activity.

View Paper: https://www.semanticscholar.org/paper/b8e06e57d7662d03ed4dee7f24e0f6b30a757547

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Citations in the corpus

Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone (2017, background): “Corsetti et al. (2013) model such a sovereign risk channel through which sovereign default risk raises the private sector cost of funds. A high cost of funds forces the government to cut spending and our model is qualitatively and quantitatively consistent with the recent research on fiscal multipli”
Sovereigns Versus Banks: Credit, Crises, and Consequences (2014, unknown): “In a related part of the literature, Corsetti et al. (2012) argue that if risk premia on public debt rise with higher levels of public debt, the multiplier effects of fiscal policy shrink.”
Exchange Rate Regimes and Fiscal Multipliers (2013, methodology): “Specifically, we consider a variant of the open-economy workhorse model suggested by Galı́ and Monacelli (2005). Corsetti et al.”
The Pass-Through of Sovereign Risk (2016, background): “Several authors have recognized the importance of this relationship in different settings: see Neumeyer and Perri (2005) and Uribe and Yue (2006) in the context of business cycles in emergingmarkets and Corsetti et al. (2013) for the implications of the sovereign risk pass-through for fiscal multipl”
Fiscal consolidations and spillovers in the Euro area periphery and core (2013, background): “Such expectations of default could lead to worse growth outcomes than consolidations per se (Corsetti et al (2012), Roeger and in 't Veld (2013)).”
Sovereign Risk and Belief-Driven Fluctuations in the Euro Area (2013, methodology): “In Corsetti et al. (2013), we model an endogenous exit from the ZLB.”