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Fiscal Policy, Inflation Tax and Default Risk in Emerging Economies

Author

Listed:
  • Horacio Sapriza
  • Gabriel Cuadra

Abstract

Emerging market economies typically experience procyclical public expenditures and private consumption, countercyclical default risk, interest rate spreads, current account and inflation tax rates as well as and higher volatility in consumption than in output. We develop a quantitative stochastic dynamic equilibrium model of a small open economy with endogenous fiscal policy and endogenous default risk and country interest rate spreads that rationalizes these empirical findings. In a quantitative analysis, the calibrated model can account for an important fraction of the magnitude of the comovement of these macroeconomic variables that is observed in data

Suggested Citation

  • Horacio Sapriza & Gabriel Cuadra, 2006. "Fiscal Policy, Inflation Tax and Default Risk in Emerging Economies," 2006 Meeting Papers 727, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:727
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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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