Fiscal Rules and the Sovereign Default Premium

• Author(s): Juan Carlos Hatchondo, Mr.Leonardo Martinez, Mr.Francisco Roch,
• Publisher: International Monetary Fund
• Pages: 28
• ISBN_10: 1463933150
  ISBN_13: 9781463933159
  
• Language: en
• Categories: Business & Economics / Economics / Macroeconomics , Business & Economics / Public Finance , Business & Economics / Finance / Financial Risk Management ,

Description:... 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.