Fiscal Policy, Inflation Tax and Default Risk in Emerging Economies

Horacio Sapriza and Gabriel Cuadra

No 727, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: Emerging market economies typically experience procyclical public expenditures and private consumption, countercyclical default risk, interest rate spreads, current account and inflation tax rates as well as and higher volatility in consumption than in output. We develop a quantitative stochastic dynamic equilibrium model of a small open economy with endogenous fiscal policy and endogenous default risk and country interest rate spreads that rationalizes these empirical findings. In a quantitative analysis, the calibrated model can account for an important fraction of the magnitude of the comovement of these macroeconomic variables that is observed in data

Keywords: Procyclical Fiscal Policy; Sovereign Default. (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:727

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