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Fiscal Rules and the Sovereign Default Premium

  • Juan Carlos Hatchondo
  • Francisco Roch
  • Leonardo Martinez

This paper finds optimal fiscal rule parameter values and measures the effects of imposing fiscal rules using a default model calibrated to an economy that in the absence of a fiscal rule pays a significant sovereign default premium. The paper also studies the case in which the government conducts a voluntary debt restructuring to capture the capital gains from the increase in its debt market value implied by a rule announcement. In addition, the paper shows how debt ceilings may reduce the procyclicality of fiscal policy and thus consumption volatility.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/30.

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Length: 28
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/30
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  1. Evi Pappa, 2004. "The unbearable tightness of being in a monetary union : fiscal restrictions and regional stability," LSE Research Online Documents on Economics 510, London School of Economics and Political Science, LSE Library.
  2. Juan Carlos Hatchondo & Leonardo Martinez, 2009. "Long-duration bonds and sovereign defaults," Working Paper 08-02, Federal Reserve Bank of Richmond.
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  9. Juan Carlos Hatchondo & Leonardo Martinez, 2012. "Debt dilution and sovereign default risk," Working Paper 10-08, Federal Reserve Bank of Richmond.
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  28. Boz, Emine & Daude, Christian & Bora Durdu, C., 2011. "Emerging market business cycles: Learning about the trend," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 616-631.
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  33. Osterloh, Steffen & Heinemann, Friedrich & Kalb, Alexander, 2013. "Sovereign risk premia: The link between fiscal rules and stability culture," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80043, Verein für Socialpolitik / German Economic Association.
  34. Jorge Restrepo & Carlos Garcia & Evan Tanner, 2011. "Fiscal Rules in a Volatile World; A Welfare-Based Approach," IMF Working Papers 11/56, International Monetary Fund.
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  39. Juan Pablo Medina & Claudio Soto, 2007. "Copper Price, Fiscal Policu and Business Cycle in Chile," Working Papers Central Bank of Chile 458, Central Bank of Chile.
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