Revisiting the fiscal theory of sovereign risk from a DSGE viewpoint

Eiji Okano () and Kazuyuki Inagaki

No 1901, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics

Abstract: We revisit Uribe's[32]'fiscal theory of sovereign risk,' which suggests a trade-off between stabilizing inflation and suppressing default. Unlike Uribe[32], we develop a class of dynamic stochastic general equilibrium models in which the fiscal surplus is endogenous, but where the default mechanism follows Uribe[32] with nominal rigidities. We find that an optimal monetary and fiscal policy, in which both the nominal interest rate and the tax rate are policy instruments, not only stabilizes inflation and the output gap, but also default through stabilizing the fiscal surplus. Thus, there is not necessarily a trade-off between stabilizing inflation and suppressing default.

Keywords: Sovereign Risk; Optimal Monetary Policy; Fiscal Theory of the Price Level (search for similar items in EconPapers)
JEL-codes: E52 E60 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://eprints.bbk.ac.uk/28256/1/28256.pdf First version, 2019

Related works:
Journal Article: Revisiting the fiscal theory of sovereign risk from a DSGE viewpoint (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bbk:bbkcam:1901

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics Malet St.,London WC1E 7HX, UK.
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).