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Fiscal Policy and Default Risk in Emerging Markets

  • Gabriel Cuadra
  • Horacio Sapriza

Emerging economies usually experience procyclical public expenditures, tax rates and private consumption, countercyclical default risk, interest rate spreads and current account and higher volatility in consumption than in output. In this article we develop a dynamic stochastic equilibrium model of a small open economy with endogenous fiscal policy, endogenous default risk and country interest rate spreads in an incomplete credit markets framework that rationalizes these empirical findings.

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Paper provided by Banco de México in its series Working Papers with number 2007-03.

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Date of creation: Mar 2007
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Handle: RePEc:bdm:wpaper:2007-03
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