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Optimal tax and debt policy with endogenously imperfect creditworthiness

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Joshua Aizenman, Michael Gavin, Ricardo Hausmann

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Abstract

This paper studies the patterns of optimal tax rates and borrowing in a developing country characterized by a costly tax collection. Its access to the international credit market is determined by the efficiency of the tax system, the relative bargaining power of creditors, and the outstanding debt. Country risk modifies considerably the pattern of taxes and borrowing in recessions. The tax rate exhibits strong counter-cyclical patterns in economies operating close to the credit ceiling, whereas the tax rate exhibits very few cyclical patterns in economies operating on the elastic portion of the supply of credit, where country risk factors are absent.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Journal of International Trade & Economic Development.

Volume (Year): 9 (2000)
Issue (Month): 4 (December)
Pages: 367-395
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Handle: RePEc:taf:jitecd:v:9:y:2000:i:4:p:367-395

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Related research
Keywords: Borrowing Constraints Credit Ceilings Optimal Tax;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robert J. Barro, 1986. "The Behavior of United States Deficits," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 361-394 National Bureau of Economic Research, Inc. [Downloadable!]
  2. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier. [Downloadable!] (restricted)
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  3. Elhanan Helpman, 1989. "The Simple Analytics of Debt-Equity Swaps," NBER Working Papers 2771, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  5. Calvo, Guillermo A & Guidotti, Pablo E, 1993. "On the Flexibility of Monetary Policy: The Case of the Optimal Inflation Tax," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 667-87, July. [Downloadable!] (restricted)
  6. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February. [Downloadable!] (restricted)
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  8. Guillermo A. Calvo & Enrique G. Mendoza, 1996. "Mexico's balance-of-payments crisis: a chronicle of death foretold," International Finance Discussion Papers 545, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  9. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," RES Working Papers 4032, Inter-American Development Bank, Research Department. [Downloadable!]
  11. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness," NBER Working Papers 10496, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Gabriel Cuadra & Juan M. Sanchez & Horacio Sapriza, 2009. "Fiscal policy and default risk in emerging markets," Working Paper 09-01, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  3. Garima Vasishtha, 2007. "Domestic versus External Borrowing and Fiscal Policy in Emerging Markets," Working Papers 07-33, Bank of Canada. [Downloadable!]
  4. Pierre-Richard Agenor & Joshua Aizenman, 1997. "Contagion and Volatility with Imperfect Credit Markets," NBER Working Papers 6080, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Joshua Aizenman & Nancy P. Marion, 2002. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," NBER Working Papers 9154, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Joshua Aizenman & Ilan Noy, 2003. "Endogenous Financial Openness: Efficiency and Political Economy Considerations," NBER Working Papers 10144, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness: Political Economy Considerations," Economics Study Area Working Papers 72, East-West Center, Economics Study Area, revised Sep 2004. [Downloadable!]
  8. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness: Efficiency and Political Economy Considerations," Working Papers 200404, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
  9. Jose Ricardo da Costa e Silva & Ryan A. Compton, 2006. "Capital Flows And Destabilizing Policy In Latin America," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 12, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
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