Numerical fiscal rules for economic unions: The role of sovereign spreads

Juan Carlos Hatchondo, Leonardo Martinez and Francisco Roch

Economics Letters, 2022, vol. 210, issue C

Abstract: We study gains from introducing common numerical fiscal rules in a “Union” of model economies facing sovereign default risk. We show that among economies in the Union, there is significant disagreement about the common debt limit the Union should implement: the limit preferred by some economies can generate welfare losses in other economies. In contrast, a common sovereign spread limit produces welfare gains across economies in the Union. This result also implies that a spread limit is a more robust rule than a debt limit for a single economy that faces uncertainty about its key characteristics.

Keywords: Fiscal rules; Sovereign spread; Spread limit; Default; Long-term debt; Debt dilution; Debt intolerance (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Numerical Fiscal Rules for Economic Unions: the Role of Sovereign Spreads (2022)
Working Paper: Numerical Fiscal Rules for Economic Unions: the Role of Sovereign Spreads (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:210:y:2022:i:c:s0165176521004353

DOI: 10.1016/j.econlet.2021.110168

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