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Fiscal Policy and Default Risk in Emerging Markets

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  • Gabriel Cuadra
  • Horacio Sapriza

Abstract

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.

Suggested Citation

  • Gabriel Cuadra & Horacio Sapriza, 2007. "Fiscal Policy and Default Risk in Emerging Markets," Working Papers 2007-03, Banco de México.
  • Handle: RePEc:bdm:wpaper:2007-03
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    More about this item

    Keywords

    Procyclical fiscal policy; Sovereign default;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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