The Impact of Fiscal Policy on Emerging Markets Sovereign Spreads

Katia Rocha () and Ajax Moreira ()
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Katia Rocha: Institute for Applied Economic Research (IPEA)
Ajax Moreira: Institute for Applied Economic Research (IPEA)

Brazilian Review of Finance, 2012, vol. 10, issue 1, 31-48

Abstract: Country risk or sovereign spreads affect directly the investment of companies and sovereigns, being an important figure to domestic interest rates and to economic growth. This paper analyzes the impact of fiscal policy on the determinants of the sovereign risk of 23 emerging market countries between 1995-2008. The results associate lower spreads to fiscal austerity, i.e. an accumulation of primary budget surplus that keeps the debt to GDP ratio constant over time. An increase of 1% on primary budget surplus decreases the spreads around 50 basis point. It evidences that fiscal policy sustainability plays a relevant role in determining the sovereign spreads besides contributing as a policy that mitigates external shocks.

Keywords: Emerging Markets; Sovereign Spreads; Fiscal Austerity; Quality of the Fiscal Adjustment (search for similar items in EconPapers)
JEL-codes: E62 F37 G15 H62 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:10:y:2012:i:1:p:31-48

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