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Fiscal Rules and the Sovereign Default Premium

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Author Info

  • Juan Carlos Hatchondo
  • Francisco Roch
  • Leonardo Martinez

Abstract

This paper finds optimal fiscal rule parameter values and measures the effects of imposing fiscal rules using a default model calibrated to an economy that in the absence of a fiscal rule pays a significant sovereign default premium. The paper also studies the case in which the government conducts a voluntary debt restructuring to capture the capital gains from the increase in its debt market value implied by a rule announcement. In addition, the paper shows how debt ceilings may reduce the procyclicality of fiscal policy and thus consumption volatility.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/30.

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Length: 28
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/30

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Related research

Keywords: Fiscal consolidation; Debt restructuring; Economic models; Risk premium; Sovereign debt;

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References

References listed on IDEAS
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  1. Ceyhun Bora Durdu, 2007. "Quantitative Implications of Indexed Bonds in Small Open Economies," 2007 Meeting Papers 482, Society for Economic Dynamics.
  2. Satyajit Chatterjee & Burcu Eyigungor, 2011. "Maturity, indebtedness, and default risk," Working Papers 11-33, Federal Reserve Bank of Philadelphia.
  3. Leonardo Martinez & Juan Carlos Hatchondo & Cesar Sosa Padilla, 2011. "Debt Dilution and Sovereign Default Risk," IMF Working Papers 11/70, International Monetary Fund.
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  8. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
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  20. Osterloh, Steffen & Heinemann, Friedrich & Kalb, Alexander, 2013. "Sovereign risk premia: The link between fiscal rules and stability culture," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80043, Verein für Socialpolitik / German Economic Association.
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  26. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2009. "Heterogeneous Borrowers In Quantitative Models Of Sovereign Default," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1129-1151, November.
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  33. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2011. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," NBER Working Papers 16782, National Bureau of Economic Research, Inc.
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  37. Anna Iara & Guntram B. Wolff, 2011. "Rules and risk in the euro area," Working Papers 615, Bruegel.
  38. David Benjamin & Mark L. J. Wright, 2009. "Recovery Before Redemption: A Theory Of Delays In Sovereign Debt Renegotiations," CAMA Working Papers 2009-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  39. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2007. "Quantitative models of sovereign default and the threat of financial exclusion," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 251-286.
  40. Adrien Verdelhan & Nicola Borri, 2010. "Sovereign Risk Premia," 2010 Meeting Papers 1122, Society for Economic Dynamics.
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Citations

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Cited by:
  1. Juan Carlos Hatchondo & Leonardo Martinez, 2012. "On the benefits of GDP-indexed government debt: lessons from a model of sovereign defaults," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 139-157.
  2. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS
  3. Hatchondo, Juan Carlos & Martinez, Leonardo & Sosa Padilla, César, 2014. "Voluntary sovereign debt exchanges," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 32-50.
  4. Juan Carlos Hatchondo & Leonardo Martinez, 2013. "Sudden stops, time inconsistency, and the duration of sovereign debt," IMF Working Papers 13/174, International Monetary Fund.
  5. Heinemann, Friedrich & Osterloh, Steffen & Kalb, Alexander, 2014. "Sovereign risk premia: The link between fiscal rules and stability culture," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 110-127.
  6. Leonardo Martinez & Juan Carlos Hatchondo & Cesar Sosa Padilla, 2011. "Debt Dilution and Sovereign Default Risk," IMF Working Papers 11/70, International Monetary Fund.
  7. Joy, Mark, 2012. "Sovereign default and macroeconomic tipping points," Research Technical Papers 10/RT/12, Central Bank of Ireland.
  8. Gustavo Adler & Sebastian Sosa, 2013. "External Conditions and Debt Sustainability in Latin America," IMF Working Papers 13/27, International Monetary Fund.
  9. Osterloh, Steffen & Heinemann, Friedrich & Kalb, Alexander, 2013. "Sovereign risk premia: The link between fiscal rules and stability culture," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80043, Verein für Socialpolitik / German Economic Association.
  10. Daniel Kapp, 2012. "The optimal size of the European Stability Mechanism: A cost-benefit analysis," DNB Working Papers 349, Netherlands Central Bank, Research Department.

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