Fiscal policy and default risk in emerging markets

Gabriel Cuadra (), Juan M. Sanchez and Horacio Sapriza

No 09-01, Working Paper from Federal Reserve Bank of Richmond

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.

Keywords: Business cycles; Macroeconomics (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Date: 2009
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Related works:
Working Paper: Fiscal Policy and Default Risk in Emerging Markets (2007)
Journal Article: Fiscal Policy and Default Risk in Emerging Markets
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