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Original Sin and Procylical Fiscal Policy

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  • Gustavo Adler

Abstract

The paper develops a simple model of sovereign debt where default both through direct repudiation and through inflation are possible and give rise to (endogenous) constraints on the currency composition and the level of public debt. This set up allows to show that procyclicality of fiscal policy in EMEs can arise as a by-product of the "original sin" and both can be explained by the presence of weak monetary institutions which cannot commit to price stability. The paper suggests that, as monetary institutions in EMEs strengthen, the "original sin" would fade away and the cyclical properties of fiscal policy would improve.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/209.

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Length: 27
Date of creation: 01 Sep 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/209

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Related research

Keywords: Sovereign debt; Price stabilization; Public debt; Emerging markets; Developing countries; Economic models; fiscal policy; government expenditure; expenditure; budget constraint; government budget; government budget constraint; public spending; public expenditure; tax base; tax revenues; fiscal constraint; fiscal stance; fiscal authority; fiscal cost; government spending; fiscal revenues; fiscal surpluses; general government expenditure; cyclical fiscal policy; fiscal policy instrument; tax policy; taxation; fiscal budget; tax system; expenditure level;

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  1. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 940-71, October.
  2. Joshua Aizenman & Michael Gavin & Ricardo Hausmann, 1996. "Optimal Tax and Debt Policy with Endogenously Imperfect Creditworthiness," NBER Working Papers 5558, National Bureau of Economic Research, Inc.
  3. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. VĂ©gh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  4. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
  5. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
  6. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 22-46, March.
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