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Fiscal Rules and the Sovereign Default Premium

Listed author(s):
  • 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
Handle: RePEc:imf:imfwpa:12/30
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