Sovereign default risk and commitment for fiscal adjustment

Carlos Goncalves and Bernardo Guimaraes

Journal of International Economics, 2015, vol. 95, issue 1, 68-82

Abstract: This paper studies fiscal policy in a model of sovereign debt and default. A time inconsistency problem arises: since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates, debtor countries choose suboptimally low fiscal adjustments. An international organization, capable of designing a contract that coaxes debtors into a tougher fiscal stance via the provision of cheap senior lending in times of crisis, can work as a commitment device and improve social welfare.

Keywords: Fiscal adjustment; Sovereign debt; Sovereign default; Time inconsistency; IMF (search for similar items in EconPapers)
JEL-codes: F33 F34 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (13)

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Related works:
Working Paper: Sovereign default risk and commitment for fiscal adjustment (2012)
Working Paper: Sovereign default risk and commitment for fiscal adjustment (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:95:y:2015:i:1:p:68-82

DOI: 10.1016/j.jinteco.2014.11.008

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