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Sovereign Debt Risk Premia and Fiscal Policy in Sweden

  • Huixin Bi
  • Eric M. Leeper

This paper takes a step toward providing a general equilibrium framework within which to study the nub of the current fiscal debate around the world: what are the tradeoffs between short-run stabilization and long-run sustainability when the perceived riskiness of government debt depends, in part, on the current and expected fiscal environment in place? We calibrate a simple model to Swedish fiscal data in two periods: before and after the financial crisis of the early 1990s. We compute the dynamic fiscal limit, which depends on the peak of the Laffer curve, for the pre-crisis and three alternative post-crisis fiscal policies. The model simulates the macroeconomic consequences of alternative policies in the face of the sequence of bad output shocks that Sweden experienced from 1991-1997.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15810.

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Date of creation: Mar 2010
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Publication status: published as “Sovereign Debt Risk Premia and Fiscal Policy in Sweden,” Swedish Economic Policy Review, 2010 (with Huixin Bi)
Handle: RePEc:nbr:nberwo:15810
Note: EFG
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