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The Impact of Fiscal Policy on Emerging Markets Sovereign Spreads

Author

Listed:
  • Katia Rocha

    (Institute for Applied Economic Research (IPEA))

  • Ajax Moreira

    (Institute for Applied Economic Research (IPEA))

Abstract

Country risk or sovereign spreads affect directly the investment of companies and sovereigns, being an important figure to domestic interest rates and to economic growth. This paper analyzes the impact of fiscal policy on the determinants of the sovereign risk of 23 emerging market countries between 1995-2008. The results associate lower spreads to fiscal austerity, i.e. an accumulation of primary budget surplus that keeps the debt to GDP ratio constant over time. An increase of 1% on primary budget surplus decreases the spreads around 50 basis point. It evidences that fiscal policy sustainability plays a relevant role in determining the sovereign spreads besides contributing as a policy that mitigates external shocks.

Suggested Citation

  • Katia Rocha & Ajax Moreira, 2012. "The Impact of Fiscal Policy on Emerging Markets Sovereign Spreads," Brazilian Review of Finance, Brazilian Society of Finance, vol. 10(1), pages 31-48.
    • Handle: RePEc:brf:journl:v:10:y:2012:i:1:p:31-48
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    More about this item

    Keywords

    Emerging Markets; Sovereign Spreads; Fiscal Austerity; Quality of the Fiscal Adjustment;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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