Fiscal Policy and Default Risk in Emerging Markets

Gabriel Cuadra (), Juan M. Sanchez and Horacio Sapriza
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Horacio Sapriza: Banco de Mexico

Review of Economic Dynamics

Abstract: Emerging market economies typically exhibit a procyclical fiscal policy: public expenditures rise (fall) in economic expansions (recessions), whereas tax rates rise (fall) in bad (good) times. Additionally, the business cycle of these economies is characterized by countercyclical default risk. In this paper we develop a quantitative dynamic stochastic small open economy model with incomplete markets, endogenous fiscal policy and sovereign default where public expenditures and tax rates are optimally procyclical. The model also accounts for the dynamics of other key macroeconomic variables in emerging economies. (Copyright: Elsevier)

Keywords: Procyclical fiscal policy; Sovereign default risk; Endogenous borrowing constraints (search for similar items in EconPapers)
JEL-codes: E62 F34 F41 (search for similar items in EconPapers)
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http://dx.doi.org/10.1016/j.red.2009.07.002
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Related works:
Working Paper: Fiscal policy and default risk in emerging markets (2009)
Working Paper: Fiscal Policy and Default Risk in Emerging Markets (2007)
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