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Sovereign default risk and commitment for fiscal adjustment

Carlos Goncalves () and Bernardo Guimaraes

No 9163, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 lender of last resort, capable of designing an implicit contract that coax debtors into a tougher fiscal stance via the provision of cheap (but senior) lending in times of crisis, can work as a commitment device and improve social welfare.

Keywords: fiscal adjustment; IMF; sovereign debt; sovereign default; time inconsistency (search for similar items in EconPapers)
JEL-codes: F33 F34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm
Date: 2012-10
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Journal Article: Sovereign default risk and commitment for fiscal adjustment (2015) Downloads
Working Paper: Sovereign default risk and commitment for fiscal adjustment (2012) Downloads
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