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Optimal Fiscal Policy and Sovereign Debt: A signaling model

Author

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  • Guido Sandler

Abstract

This paper analyzes the optimal use of fiscal policy and sovereign debt repayment as signals in an asymmetric information environment. It shows that the presence of government private information could turn an optimal full-information countercyclical fiscal policy into a pro-cyclical one that exacerbates the cycle. This may occur if the effect of aggregate shocks on the signaling properties of fiscal policy is not symmetric across states. An alternative channel for this result could be the impact of the cycle on the government borrowing constraints. These two mechanisms provide a rational for the observed pro-cyclicality in fiscal policy in emerging countries where both private information and sovereign borrowing constraints are more pervasive than in developed economies

Suggested Citation

  • Guido Sandler, 2006. "Optimal Fiscal Policy and Sovereign Debt: A signaling model," 2006 Meeting Papers 488, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:488
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    More about this item

    Keywords

    Fiscal Policy; Sovereign Debt; Taxation; asymmetric information;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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