Sovereign Risk, Fiscal Policy, and Macroeconomic Stability
AbstractThis paper analyzes the impact of strained government finances on macroeconomic stability and the transmission of fiscal policy. Using a variant of the model by Curdia and Woodford (2009), we study a 'sovereign risk channel' through which sovereign default risk raises funding costs in the private sector. If monetary policy is constrained, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy may become self-fulfilling. In addition, sovereign risk amplifies the effects of negative cyclical shocks. Under those conditions, fiscal retrenchment can help curtail the risk of macroeconomic instability and, in extreme cases, even stimulate economic activity.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8779.
Date of creation: Jan 2012
Date of revision:
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Other versions of this item:
- Giancarlo Corsetti & Keith Kuester & André Meier & Gernot J. Müller, 2013. "Sovereign Risk, Fiscal Policy, and Macroeconomic Stability," Economic Journal, Royal Economic Society, vol. 0, pages F99-F132, 02.
- Keith Kuester & Gernot J. Mueller & Giancarlo Corsetti & AndrÃ© Meier, 2012. "Sovereign Risk, Fiscal Policy, and Macroeconomic Stability," IMF Working Papers 12/33, International Monetary Fund.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
- NEP-CBA-2012-03-28 (Central Banking)
- NEP-MAC-2012-03-28 (Macroeconomics)
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.:
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- LâaustÃ©ritÃ© plus que toujours en question
by jcbriquet in Ressources pour économistes on 2012-04-17 11:32:27
- Schleer, Frauke & Semmler, Willi, 2014. "Financial sector-output dynamics in the euro area: Non-linearities reconsidered," ZEW Discussion Papers 13-068 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Corsetti, Giancarlo & Meier, André & Müller, Gernot, 2012.
"What Determines Government Spending Multipliers?,"
CEPR Discussion Papers
9010, C.E.P.R. Discussion Papers.
- Gonzalo Caballero, 2013. "Effects of Fiscal and Monetary Policy in the Great Recession," Economies, MDPI, Open Access Journal, vol. 1(2), pages 15-18, September.
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