Seigniorage and Sovereign Default: The Response of Emerging Markets to COVID-19
Emilio Espino (),
Julian Kozlowski (),
Fernando Martin () and
No 2020-017, Working Papers from Federal Reserve Bank of St. Louis
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
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