 Fiscal retrenchments and the transmission mechanism of the sovereign risk channel for highly indebted countriesElton Beqiraj, Silvia Fedeli and Massimiliano Tancioni () The North American Journal of Economics and Finance, 2021, vol. 57, issue C Abstract: We formalize sovereign and private sector default probabilities into a monetary model in order to test the hypothesis, which recently appeared in the literature, of whether the consideration of a sovereign risk channel affects the sign and size of output fiscal multipliers. The model is estimated for the most vulnerable Eurozone countries-characterized by high debt-to-GDP ratio-and stochastically simulated conditional on expenditure and revenue policy measures. We show that, conditional on specific fiscal shocks, the risk channel can operate in a pro-cyclical direction, amplifying the temporary contractionary effects of fiscal retrenchments. We show that both the relations between economic fundamentals and sovereign debt spreads and that between sovereign and credit spreads are weak. Therefore, the effectiveness of the risk channel for fiscal consolidations is small, irrespective of the direction of change in the sovereign default probability. Keywords: Drisk; Interest rates; Fiscal policy; Monetary policy; Bayesian estimation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000358 DOI: 10.1016/j.najef.2021.101400 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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