Fiscal Rules and Sovereign Default

Laura Alfaro

No 209, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We provide a quantitative analysis of fiscal rules in a standard model of sovereign debt accumulation and default, modified to incorporate quasi-hyperbolic preferences. Due to the aggregation of citizens’ preferences or to political economy reasons, government preferences are present biased, and results in over accumulation of debt. In a quantitative exercise calibrated to Brazil, we obtain that the welfare gains of the optimal fiscal policy are economically substantial, and that the optimal rule does not entail a countercyclical fiscal policy. We also analyze the cases of a simple debt rule limiting the maximum amount of debt and compare it to that of a simple deficit rule, which limits the maximum amount of deficit per period. Whereas the deficit rule does not perform well, the debt rule results in welfare gains virtually equal to the optimal rule.

Date: 2016
New Economics Papers: this item is included in nep-dge and nep-pbe
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Citations: View citations in EconPapers (8)

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Working Paper: Fiscal Rules and Sovereign Default (2017)
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