Optimal fiscal policy and sovereign debt crises

Stefan Niemann and Paul Pichler ()
Additional contact information
Paul Pichler: Economic Studies Division, Oesterreichische Nationalbank, Austria

Working Papers from Oesterreichische Nationalbank (Austrian Central Bank)

Abstract: This paper studies how sovereign risk – both fundamental and self-fulfilling – shapes the cyclical behavior of optimalfiscal policy. We develop a model with endogenous default costs where market sentiment can induce belief-driven debt rollover crises. Optimal taxes and public spending are generally procyclical, but the incidence of rollover risk gives rise to infrequent episodes of severely countercyclicaliscal activity. These endogenous regime changes are associated with pronounced countercyclical changes in the level of debt. Debt buildups are triggered already by relatively mild recessions, but successful fiscal consolidations occur only in exceptionally good times.

Keywords: Fiscal policy; sovereign debt; rollover crises; regime switches (search for similar items in EconPapers)
JEL-codes: E62 F34 H63 (search for similar items in EconPapers)
Pages: 42
Date: 2017-12-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.oenb.at/dam/jcr:8f7be62c-e8e4-4617-a93 ... 552/WP218_screen.pdf (application/pdf)

Related works:
Journal Article: Optimal fiscal policy and sovereign debt crises (2020)
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:onb:oenbwp:218

Ordering information: This working paper can be ordered from
Oesterreichische Nationalbank, Economic Studies Division, POB 61, A-1011 Vienna, Austria

Access Statistics for this paper

More papers in Working Papers from Oesterreichische Nationalbank (Austrian Central Bank) P.O. Box 61, A-1011 Vienna, Austria. Contact information at EDIRC.
Bibliographic data for series maintained by Markus Knell ().