Fiscal Stimulus under Sovereign Risk

Javier Bianchi, Pablo Ottonello and Ignacio Presno

No 26307, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What is the optimal fiscal policy response to a recession when the government is subject to sovereign risk? We study this question in a model of endogenous sovereign default with nominal rigidities. Increasing spending in a recession reduces unemployment, but exposes the government to a debt crisis. We quantitatively analyze this trade-off between stimulus and austerity and find that expanding government spending may be undesirable, even in the presence of sizeable Keynesian stabilization gains and inequality concerns. Consistent with these findings, we show that sovereign risk is a key driver of the fiscal procyclicality observed worldwide.

JEL-codes: E62 F34 F41 F44 H50 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-mac, nep-opm and nep-ore
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

Published as Javier Bianchi & Pablo Ottonello & Ignacio Presno, 2023. "Fiscal Stimulus under Sovereign Risk," Journal of Political Economy, vol 131(9), pages 2328-2369.

Downloads: (external link)
http://www.nber.org/papers/w26307.pdf (application/pdf)

Related works:
Journal Article: Fiscal Stimulus under Sovereign Risk (2023)
Working Paper: Fiscal Stimulus Under Sovereign Risk (2019)
Working Paper: Fiscal Stimulus under Sovereign Risk (2019)
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:nbr:nberwo:26307

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w26307

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().