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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Fiscal Stimulus Under Sovereign Risk
The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and provide a model of optimal fiscal policy with nominal rigidities and endogenous sovereign default that can account for this empirical pattern. Financing a fiscal stimulus is costly for risky countries and can render countercyclical policies undesirable, even in the presence of large Keynesian stabilization gains. We also show that imposing austerity can backfire by exacerbating the exposure to default, but a well-designed "fiscal forward guidance" can help reduce the excess procyclicality.
Cite this item
Javier Bianchi & Pablo Ottonello & Ignacio Presno, Fiscal Stimulus Under Sovereign Risk, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1257, 20 Sep 2019.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
Keywords: Fiscal Stabilization Policy ; Sovereign Default ; Procyclicality
This item with handle RePEc:fip:fedgif:1257
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