Fiscal Rules and the Sovereign Default Premium

Juan Carlos Hatchondo, Francisco Roch and Leonardo Martinez

No 12/30, IMF Working Papers from International Monetary Fund

Abstract: This paper finds optimal fiscal rule parameter values and measures the effects of imposing fiscal rules using a default model calibrated to an economy that in the absence of a fiscal rule pays a significant sovereign default premium. The paper also studies the case in which the government conducts a voluntary debt restructuring to capture the capital gains from the increase in its debt market value implied by a rule announcement. In addition, the paper shows how debt ceilings may reduce the procyclicality of fiscal policy and thus consumption volatility.

Keywords: Fiscal consolidation; Debt restructuring; Economic models; Risk premium; Sovereign debt (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Date: 2012-01-01
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Working Paper: Fiscal rules and the sovereign default premium (2012)
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