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Fiscal Policy and Financial Markets Author info | Abstract | Publisher info | Download info | Related research | Statistics Thomas Stratmann
Bernardin Akitoby
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This paper introduces fiscal policy in a model of sovereign risk spreads ("spreads"). Using panel data from emerging market countries, we find that reductions in public expenditure are a more powerful tool for reducing spreads than increases in revenues. Specifically, cuts in current spending lower spreads by more than cuts in investment spending, and they also lower spreads by more than increases in revenue. We also show that debt-financed current spending increases sovereign risk by more than tax-financed current spending, suggesting that international investors have some preference for the latter. In line with the empirical literature on the determinants of spreads, we find that liquidity and solvency indicators, as well as macroeconomic fundamentals, are also important determinants of spreads.
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Paper provided by International Monetary Fund in its series IMF Working Papers with number
06/16.
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Length: 26 pages
Date of creation: 30 Jan 2006Date of revision:
Handle: RePEc:imf:imfwpa:06/16Contact details of provider: Postal: International Monetary Fund, Washington, DC USA Phone: (202) 623-7000 Fax: (202) 623-4661 Email: Web page: http://www.imf.org/external/pubind.htm More information through EDIRC
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Keywords: Fiscal policy Risk premium Bond markets Emerging markets Financial systems Government expenditures Revenues Other versions of this item:
This paper has been announced in the following NEP Reports :
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.: Paolo Mauro & Nathan Sussman & Yishay Yafeh, 2002.
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references 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.)
David Hauner & Jirà Jonáš & Manmohan S. Kumar, 2007.
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"The final blow to the Stability Pact? EMU enlargement and government debt ,"
Otto-Wolff-Institut Discussion Paper Series
03/2006, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
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Moser, Christoph, 2007.
"The Impact of Political Risk on Sovereign Bond Spreads - Evidence from Latin America ,"
Proceedings of the German Development Economics Conference, Göttingen 2007
24, Verein für Socialpolitik, Research Committee Development Economics.
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