Sovereign default risk and commitment for fiscal adjustment

Bernardo Guimaraes and Gonçalves, Carlos Eduardo
Authors registered in the RePEc Author Service: Carlos Eduardo Goncalves

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)
Date: 2012-10
New Economics Papers: this item is included in nep-opm
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Related works:
Journal Article: Sovereign default risk and commitment for fiscal adjustment (2015)
Working Paper: Sovereign default risk and commitment for fiscal adjustment (2012)
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