Domestic Policies and Sovereign Default

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

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

Abstract: A model with two essential elements, sovereign default and distortionary fiscal and monetary policies, explains the interaction between sovereign debt, default risk and inflation in emerging countries. We derive conditions under which monetary policy is actively used to support fiscal policy and characterize the intertemporal tradeoffs that determine the choice of debt. We show that in response to adverse shocks to the terms of trade or productivity, governments reduce debt and deficits, and increase inflation and currency depreciation rates, matching the patterns observed in the data for emerging economies.

Keywords: limited commitment; sovereign debt; inflation; fiscal policy; monetary policy; emerging markets; Latin America (search for similar items in EconPapers)
JEL-codes: E52 E62 F34 F41 G15 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2020-07-10, Revised 2023-09-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
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Citations: View citations in EconPapers (3)

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Journal Article: Domestic Policies and Sovereign Default (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:88355

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DOI: 10.20955/wp.2020.017

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