Sovereign default risk and commitment for fiscal adjustment

Carlos Goncalves and Bernardo Guimaraes

No 2012_23, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: This paper studies fiscal policy in a model of sovereign debt and default. A time-inconsistency problem arises: since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates, debtor countries choose suboptimally low fiscal adjustments. An international lender of last resort, capable of designing an implicit contract that coax debtors into a tougher fiscal stance via the provision of cheap (but senior) lending in times of crisis, can work as a commitment device and improve social welfare.

Keywords: fiscal adjustment, sovereign debt, sovereign default; time inconsistency; IMF (search for similar items in EconPapers)
JEL-codes: F33 F34 (search for similar items in EconPapers)
Date: 2012-09-18
New Economics Papers: this item is included in nep-cba and nep-dge
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Sovereign default risk and commitment for fiscal adjustment (2015)
Working Paper: Sovereign default risk and commitment for fiscal adjustment (2012)
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