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Domestic Policies and Sovereign Default

Author

Listed:
  • Emilio Espino
  • Julian Kozlowski
  • Fernando M. Martin
  • Juan M. Sánchez

Abstract

A model with two essential elements—sovereign default and distortionary fiscal and monetary policies—explains the interaction between sovereign debt, default risk, and inflation in emerging countries. We derive conditions under which monetary policy is actively used to support fiscal policy and characterize the intertemporal trade-offs that determine the choice of debt. We show that in response to adverse shocks to the terms of trade or productivity, governments reduce debt and deficits and increase inflation and currency depreciation rates, matching the patterns observed in the data for emerging economies.

Suggested Citation

  • Emilio Espino & Julian Kozlowski & Fernando M. Martin & Juan M. Sánchez, 2025. "Domestic Policies and Sovereign Default," American Economic Journal: Macroeconomics, American Economic Association, vol. 17(3), pages 74-113, July.
    • Handle: RePEc:aea:aejmac:v:17:y:2025:i:3:p:74-113
    DOI: 10.1257/mac.20220294
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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