Domestic Policies and Sovereign Default

Emilio Espino, Julian Kozlowski, Fernando M. Martin and Juan M. Sánchez

American Economic Journal: Macroeconomics, 2025, vol. 17, issue 3, 74-113

Abstract: A model with two essential elements—sovereign default and distortionary fiscal and monetary policies—explains the interaction between sovereign debt, default risk, and inflation in emerging countries. We derive conditions under which monetary policy is actively used to support fiscal policy and characterize the intertemporal trade-offs that determine the choice of debt. We show that in response to adverse shocks to the terms of trade or productivity, governments reduce debt and deficits and increase inflation and currency depreciation rates, matching the patterns observed in the data for emerging economies.

JEL-codes: E31 E52 E62 F34 F41 H63 O23 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/mac.20220294

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