Fiscal Rules and the Sovereign Default Premium

By Leonardo Martinez, Francisco Roch, J. Hatchondo. Social Science Research Network, 2022

117 citations recorded by the source corpus.

We study fiscal rules using a sovereign default model. A debt-brake (spread-brake) rule imposes a ceiling on the fiscal deficit when the sovereign debt (spread) is above a threshold. For our benchmark calibration, similar gains can be achieved with the optimal debt or spread brake. However, for a “Union” of heterogeneous economies, a common spread brake generates larger gains than a common debt brake. Furthermore, gains from abandoning a common debt brake may be significant for economies that are unnecessarily constrained by the rule. In contrast, abandoning a common spread brake would generate losses for any economy in the Union. (JEL E62, F34, F41, H61, H63)

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/d6e471d071f442784ead9518560bdc653adb1282

Citations in the corpus

• The dynamics of sovereign debt crises and bailouts (2016, unknown): “| c+ (1− θ)B = y + q(B; z)(B − θB) B ≤ B a(B, z)} (20)”