Fiscal rules and the Sovereign Default Premium

Juan Hatchondo, Leonardo Martinez and Francisco Roch

No 2015-010, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: We use a sovereign default model to study the effects of introducing limits to the decision-making capabilities of governments---fiscal rules. We show that optimal limits to the debt level vary greatly across parameterizations of the model that deliver different levels of debt tolerance. In contrast, optimal limits to the sovereign premium paid by the government are very similar across parameterizations. Since levels of debt tolerance are difficult to identify and vary both across countries and over time, and political constraints often force common fiscal rule targets across countries, these findings indicate that sovereign-premium limits may be preferable to debt limits.

Keywords: Fiscal Rules; Debt Limit; Spread Limit; Default; Sovereign Default Premium; Countercyclical Policy; Endogenous Borrowing Constraints; Long-term Debt; Debt Dilution, Debt Tolerance (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2015-03
New Economics Papers: this item is included in nep-dge and nep-pbe
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Citations: View citations in EconPapers (30)

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https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2015-010.pdf (application/pdf)

Related works:
Journal Article: Fiscal Rules and the Sovereign Default Premium (2022)
Working Paper: Fiscal rules and the sovereign default premium (2015)
Working Paper: Fiscal rules and the sovereign default premium (2012)
Working Paper: Fiscal Rules and the Sovereign Default Premium (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2015010

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