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Fiscal Policy and Default Risk in Emerging Markets

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Author Info
Gabriel Cuadra (Banco de Mexico)
Juan Sanchez (Federal Reserve Bank of Richmond)
Horacio Sapriza (Banco de Mexico)

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Abstract

Emerging market economies typically exhibit a procyclical fiscal policy: public expenditures rise (fall) in economic expansions (recessions), whereas tax rates rise (fall) in bad (good) times. Additionally, the business cycle of these economies is characterized by countercyclical default risk. In this paper we develop a quantitative dynamic stochastic small open economy model with incomplete markets, endogenous fiscal policy and sovereign default where public expenditures and tax rates are optimally procyclical. The model also accounts for the dynamics of other key macroeconomic variables in emerging economies. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.07.002
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

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Related research
Keywords: Procyclical fiscal policy; Sovereign default risk; Endogenous borrowing constraints;

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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