Seigniorage and Sovereign Default: The Response of Emerging Markets to COVID-19

Emilio Espino (), Julian Kozlowski (), Fernando Martin () and Juan Sanchez

No 2020-017, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Monetary policy affects the tradeoffs faced by governments in sovereign default models. In the absence of lump-sum taxation, governments rely on both distortionary taxes and seigniorage to finance expenditure. Furthermore, monetary policy adds a time-consistency problem in debt choice, which may mitigate or exacerbate the incentives to accumulate debt. A deterioration of the terms-of-trade leads to an increase in sovereign-default risk and inflation, and a reduction in growth, which are consistent with the empirical evidence for emerging economies. An unanticipated shock resembling the COVID-19 pandemic generates a significant currency depreciation, increased inflation, and distress in government finances.

Keywords: Default; Fiscal Policy; Sovereign Debt; Emerging Markets; Inflation; Time-consistency; Crises; COVID-19; Seigniorage; Country Risk; Exchange Rate (search for similar items in EconPapers)
JEL-codes: E52 E62 F34 F41 G15 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2020-07-10, Revised 2020-08-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
https://s3.amazonaws.com/real.stlouisfed.org/wp/2020/2020-017.pdf Full Text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:88355

Ordering information: This working paper can be ordered from

DOI: 10.20955/wp.2020.017

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by ().