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Fiscal Rules and the Sovereign Default Premium

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  • Mr. Leonardo Martinez
  • Juan Carlos Hatchondo
  • Mr. Francisco Roch

Abstract

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.

Suggested Citation

  • Mr. Leonardo Martinez & Juan Carlos Hatchondo & Mr. Francisco Roch, 2012. "Fiscal Rules and the Sovereign Default Premium," IMF Working Papers 2012/030, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2012/030
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    More about this item

    Keywords

    WP; debt ceiling; default premium; fiscal rules; fiscal consolidation; default; sovereign default premium; debt exchange; countercyclical policy; endogenous borrowing constraints; long-term debt; debt dilution; fiscal rule; debt level; rule announcement; issued debt; announcement debt path; Personal income; Debt limits; Europe;
    All these keywords.

    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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