Optimal Monetary and Fiscal Policy Rules, Welfare Gains and Exogenous Shocks in an Economy with Default Risk

Eiji Okano () and Masataka Eguchi
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Masataka Eguchi: Komazawa University

No 1902, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics

Abstract: We develop a class of dynamic stochastic general equilibrium models with nominal rigidities and we introduce default risk in the model. We find that if productivity changes are observed, policy authorities should be aware of default risk, although being aware of such risk is not very important following government expenditure changes. Welfare gains from awareness of default risk are nonnegligible if productivity changes, although welfare gains from awareness of default risk are tiny following government expenditure changes.

Keywords: Sovereign Risk; Optimal Monetary Policy; Fiscal Theory of the Price Level (search for similar items in EconPapers)
JEL-codes: E52 E60 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
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https://eprints.bbk.ac.uk/28257/7/28257.pdf First version, 2019

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