Advanced Search
MyIDEAS: Login to save this paper or follow this series

Fiscal Rules and the Sovereign Default Premium

Contents:

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=25677
Download Restriction: no

Bibliographic Info

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

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

Contact 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

Order Information:
Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

Related research

Keywords: Fiscal consolidation; Debt restructuring; Economic models; Risk premium; Sovereign debt; debt; fiscal policy; fiscal rules; interest; fiscal rule; defaults; debt level; default risk; restructuring; taxes; obligations; liabilities; debt obligations; debt service; creditors; tax revenues; public debt; payments; bond prices; fiscal adjustment; debt repayment; external debt; fiscal restrictions; fiscal deficits; credit risk; national fiscal rules; fiscal objectives; fiscal institutions; debt forgiveness; debt contracts; repayment; tax policy; public finances; unsecured credit; debts; tax base; fiscal performance; debt buyback; medium-term fiscal frameworks; fiscal affairs department; fiscal behavior; debt renegotiations; sovereign credit risk; fiscal affairs; fiscal crises; fiscal space; bond market; bond markets; repudiation; consumer credit; fiscal adjustments; credit market; debt problems; deficits; fiscal frameworks; level of indebtedness;

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Adrien Verdelhan & Nicola Borri, 2010. "Sovereign Risk Premia," 2010 Meeting Papers, Society for Economic Dynamics 1122, Society for Economic Dynamics.
  2. Igor Livshits & James MacGee & Michele Tertilt, 2005. "Consumer Bankruptcy: A Fresh Start," Discussion Papers, Stanford Institute for Economic Policy Research 04-011, Stanford Institute for Economic Policy Research.
  3. International Monetary Fund, 2011. "Business Cycles in Emerging Markets," IMF Working Papers 11/133, International Monetary Fund.
  4. Cuadra, Gabriel & Sapriza, Horacio, 2008. "Sovereign default, interest rates and political uncertainty in emerging markets," Journal of International Economics, Elsevier, Elsevier, vol. 76(1), pages 78-88, September.
  5. Gabriel Cuadra & Juan M. Sanchez & Horacio Sapriza, 2009. "Fiscal policy and default risk in emerging markets," Working Paper, Federal Reserve Bank of Richmond 09-01, Federal Reserve Bank of Richmond.
  6. repec:acb:camaaa:2009-15 is not listed on IDEAS
  7. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  8. Evi Pappa, 2004. "The unbearable tightness of being in a monetary union : fiscal restrictions and regional stability," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 510, London School of Economics and Political Science, LSE Library.
  9. Cristina Arellano & Ananth Ramanarayanan, 2012. "Default and the Maturity Structure in Sovereign Bonds," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 120(2), pages 187 - 232.
  10. Martín González-Rozada & EduardoLevy Yeyati, 2008. "Global Factors and Emerging Market Spreads," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 118(533), pages 1917-1936, November.
  11. Horacio Sapriza & Filippo Taddei & Guido Sandleris, 2008. "Indexed Sovereign Debt: An Applied Framework," 2008 Meeting Papers 1064, Society for Economic Dynamics.
  12. 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.
  13. David Benjamin, 2008. "Recovery Before Redemption," 2008 Meeting Papers 531, Society for Economic Dynamics.
  14. Beetsma, Roel M.W.J. & Debrun, Xavier, 2007. "The new stability and growth pact: A first assessment," European Economic Review, Elsevier, Elsevier, vol. 51(2), pages 453-477, February.
  15. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  16. Marina, Azzimonti & Marco, Battaglini & Stephen, Coate, 2010. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," MPRA Paper 25935, University Library of Munich, Germany.
  17. Satyajit Chatterjee & Burcu Eyigungor, 2009. "Maturity, Indebtedness, and Default Risk," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 0901, Koc University-TUSIAD Economic Research Forum.
  18. Alfaro, Laura & Kanczuk, Fabio, 2005. "Sovereign debt as a contingent claim: a quantitative approach," Journal of International Economics, Elsevier, Elsevier, vol. 65(2), pages 297-314, March.
  19. Broner, Fernando A & Lorenzoni, Guido & Schmukler, Sergio, 2007. "Why Do Emerging Economies Borrow Short Term?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6249, C.E.P.R. Discussion Papers.
  20. Leonardo Martinez & Cesar Sosa Padilla & Juan Hatchondo, 2012. "Debt dilution and sovereign default risk," 2012 Meeting Papers, Society for Economic Dynamics 974, Society for Economic Dynamics.
  21. Boz, Emine & Daude, Christian & Bora Durdu, C., 2011. "Emerging market business cycles: Learning about the trend," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(6), pages 616-631.
  22. Sandra Lizarazo, 2009. "Contagion of Financial Crises in Sovereing Debt Markets," Working Papers, Centro de Investigacion Economica, ITAM 0906, Centro de Investigacion Economica, ITAM.
  23. Carlos A. Vegh & Guillermo Vuletin, 2012. "How is Tax Policy Conducted over the Business Cycle?," NBER Working Papers 17753, National Bureau of Economic Research, Inc.
  24. Ceyhun Bora Durdu, 2007. "Quantitative Implications of Indexed Bonds in Small Open Economies," 2007 Meeting Papers, Society for Economic Dynamics 482, Society for Economic Dynamics.
  25. Jorge Restrepo & Carlos Garcia & Evan Tanner, 2011. "Fiscal Rules in a Volatile World," IMF Working Papers 11/56, International Monetary Fund.
  26. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP), Centro de Altisimos Estudios Rios Perez (CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP).
  27. Emine Boz & Christian Daude & C. Bora Durdu, 2011. "Emerging Market Business Cycles Revisited: Learning about the Trend," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1110, Koc University-TUSIAD Economic Research Forum.
  28. Juan Carlos Hatchondo & Leonardo Martinez, 2009. "Long-duration bonds and sovereign defaults," Working Paper, Federal Reserve Bank of Richmond 08-02, Federal Reserve Bank of Richmond.
  29. James M. Poterba & Kim S. Rueben, 1997. "State Fiscal Institutions and the U.S. Municipal Bond Market," NBER Working Papers 6237, National Bureau of Economic Research, Inc.
  30. Anna Iara & Guntram B. Wolff, 2011. "Rules and risk in the euro area," Working Papers, Bruegel 615, Bruegel.
  31. Laura Alfaro & Fabio Kanczuk, 2007. "Optimal reserve management and sovereign debt," Working Paper Series, Federal Reserve Bank of San Francisco 2007-29, Federal Reserve Bank of San Francisco.
  32. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Quantitative properties of sovereign default models: solution methods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 919-933, October.
  33. Michael Tomz & Mark L. J. Wright, 2007. "Do Countries Default In "Bad Times"?," CAMA Working Papers 2007-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  34. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 0, pages F4-F30, 02.
  35. 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, Elsevier, vol. 41(C), pages 110-127.
  36. Juan Pablo Medina & Claudio Soto, 2007. "Copper Price, Fiscal Policu and Business Cycle in Chile," Working Papers Central Bank of Chile, Central Bank of Chile 458, Central Bank of Chile.
  37. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1129-1151, November.
  38. 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, Federal Reserve Bank of Richmond, issue Sum, pages 251-286.
  39. Beetsma, Roel & Ribeiro, Marcos Poplawski & Schabert, Andreas, 2008. "A Comparison of Debt and Primary-deficit Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6897, C.E.P.R. Discussion Papers.
  40. Huixin Bi & Eric M. Leeper, 2013. "Analyzing Fiscal Sustainability," Working Papers, Bank of Canada 13-27, Bank of Canada.
  41. David K. Backus & Silverio Foresi & Chris Telmer, . "Discrete time models of bond pricing," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 251, Carnegie Mellon University, Tepper School of Business.
  42. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  43. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 23, pages 297-362, 04.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Gustavo Adler & Sebastian Sosa, 2013. "External Conditions and Debt Sustainability in Latin America," IMF Working Papers 13/27, International Monetary Fund.
  2. Juan Carlos Hatchondo & Leonardo Martinez, 2012. "Debt dilution and sovereign default risk," Working Paper, Federal Reserve Bank of Richmond 10-08, Federal Reserve Bank of Richmond.
  3. Juan Carlos Hatchondo & Leonardo Martinez, 2013. "Sudden stops, time inconsistency, and the duration of sovereign debt," Working Paper, Federal Reserve Bank of Richmond 13-08, Federal Reserve Bank of Richmond.
  4. 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.
  5. Beetsma, Roel & Mavromatis, Kostas, 2014. "An analysis of eurobonds," Journal of International Money and Finance, Elsevier, Elsevier, vol. 45(C), pages 91-111.
  6. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS
  7. 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, Federal Reserve Bank of Richmond, issue 2Q, pages 139-157.
  8. Daniel Kapp, 2012. "The optimal size of the European Stability Mechanism: A cost-benefit analysis," DNB Working Papers, Netherlands Central Bank, Research Department 349, Netherlands Central Bank, Research Department.
  9. Joy, Mark, 2012. "Sovereign default and macroeconomic tipping points," Research Technical Papers 10/RT/12, Central Bank of Ireland.
  10. Hatchondo, Juan Carlos & Martinez, Leonardo & Sosa Padilla, César, 2014. "Voluntary sovereign debt exchanges," Journal of Monetary Economics, Elsevier, Elsevier, vol. 61(C), pages 32-50.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:12/30. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.