Fiscal Stimulus under Sovereign Risk

Javier Bianchi, Pablo Ottonello and Ignacio Presno
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Ignacio Presno: https://www.federalreserve.gov/econres/ignacio-presno.htm

No 762, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and provide a model of optimal fiscal policy with nominal rigidities and endogenous sovereign default that can account for this empirical pattern. Financing a fiscal stimulus is costly for risky countries and can render countercyclical policies undesirable, even in the presence of large Keynesian stabilization gains. We also show that imposing austerity can backfire by exacerbating the exposure to default, but a well-designed \"fiscal forward guidance\" can help reduce the excess procyclicality.

Keywords: Fiscal stabilization policy; Sovereign default; Procyclicality (search for similar items in EconPapers)
JEL-codes: E62 F34 F41 F44 H50 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2019-09-12
New Economics Papers: this item is included in nep-mac, nep-opm and nep-ore
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Citations: View citations in EconPapers (18)

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Related works:
Journal Article: Fiscal Stimulus under Sovereign Risk (2023)
Working Paper: Fiscal Stimulus Under Sovereign Risk (2019)
Working Paper: Fiscal Stimulus under Sovereign Risk (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:762

DOI: 10.21034/wp.762

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