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Fiscal Adjustments and the Probability of Sovereign Default

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  • Christoph A. Schaltegger
  • Martin Weder

Abstract

type="main"> Based on probit estimates, this paper analyzes the effects of fiscal consolidation on the probability of sovereign default in the short run. Using a panel of 104 developing countries from 1980 to 2009 and controlling for various economic, fiscal and political factors, we find that fiscal adjustments in general do not significantly reduce the probability of default even if they are large. Instead, the composition of budget consolidation is decisive in reducing default risk. Expenditure based adjustments are not successful while revenue based adjustments lower the probability of default in the following year by 36 to 55 percent. This finding also holds when economic growth is low or government debt is high as well as when IMF lending is taken into account.

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  • Christoph A. Schaltegger & Martin Weder, 2015. "Fiscal Adjustments and the Probability of Sovereign Default," Kyklos, Wiley Blackwell, vol. 68(1), pages 81-110, February.
  • Handle: RePEc:bla:kyklos:v:68:y:2015:i:1:p:81-110
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    File URL: http://hdl.handle.net/10.1111/kykl.12074
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    Cited by:

    1. Piotr Ciżkowicz & Andrzej Rzońca & Rafał Trzeciakowski, 2015. "Windfall of Low Interest Payments and Fiscal Sustainability in the Euro Area: Analysis through Panel Fiscal Reaction Functions," Kyklos, Wiley Blackwell, vol. 68(4), pages 475-510, November.
    2. Christophe Blot & Jerôme Creel & Bruno Ducoudré & Xavier Timeau, 2015. "Back to fiscal consolidation in Europe and its dual tradeoff : now of later, through spending cuts or tax hikes," Documents de Travail de l'OFCE 2015-11, Observatoire Francais des Conjonctures Economiques (OFCE).
    3. Horn, Fabian, 2015. "Quantifying the costs of sovereign defaults using odious debt cases as a quasi-natural experiment," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113125, Verein für Socialpolitik / German Economic Association.
    4. Karim Triki, 2016. "Expenditure-based Consolidation: Experiences and Outcomes – Workshop proceedings," European Economy - Discussion Papers 2015 - 026, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    5. repec:eee:joecas:v:13:y:2016:i:c:p:100-113 is not listed on IDEAS

    More about this item

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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