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Sudden Stops, Sovereign Risk, and Fiscal Rules

Jose Gomez-Gonzalez (), Oscar Valencia () and Gustavo Sánchez

No 11137, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: This paper studies the effect of implementing fiscal rules on sovereign default risk and on the probability of large capital ow reversals for a large sample of countries including both developed and emerging market economies. Results indicate that fiscal rules are beneficial for macroeconomic stability, as they significantly reduce both sovereign risk perception and the probability of a sudden stop in countries that implement them. These results, which are robust to various empirical specifications, have important policy implications specially for countries that have relaxed their fiscal rules in response to the Covid-19 pandemic.

Keywords: Fiscal Rules; Sudden stops; sovereign default risk; dynamic heterogeneous panel data models (search for similar items in EconPapers)
JEL-codes: C33 F34 G15 (search for similar items in EconPapers)
Date: 2021-03
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