Fiscal rules and the sovereign default premium by Juan Carlos Hatchondo, Leonardo Martinez and Francisco Roch
By: Hatchondo, Juan Carlos
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Contributor(s): Martinez, Leonardo | Roch, Francisco.
Material type: 
ArticleSubject(s): POLITICA FISCAL | DEUDA PUBLICA | DEFICIT PUBLICO | ESTADOS UNIDOS
In:
American Economic Journal : Macroeconomics v. 14, n. 4, October 2022, p. 244-273Summary: e study fiscal rules using a sovereign default model. A debt-brake (spread-brake) rule imposes a ceiling on the fiscal deficit when the sovereign debt (spread) is above a threshold. For our benchmark calibration, similar gains can be achieved with the optimal debt or spread brake. However, for a "Union" of heterogeneous economies, a common spread brake generates larger gains than a common debt brake. Furthermore, gains from abandoning a common debt brake may be significant for economies that are unnecessarily constrained by the rule. In contrast, abandoning a common spread brake would generate losses for any economy in the Union.
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| OP 2137/2022/3-2 Dynamic capital tax competition under the source principle | OP 2137/2022/4 American Economic Journal : Macroeconomics | OP 2137/2022/4-1 Expectations-driven liquidity traps | OP 2137/2022/4-2 Fiscal rules and the sovereign default premium | OP 2137/2022/4-3 Monetary policy and liquidity constraints | OP 2137/2022/4-4 Learning on the job and the cost of business cycles | OP 2137/2022/4-5 Optimal public debt with life cycle motives |
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e study fiscal rules using a sovereign default model. A debt-brake (spread-brake) rule imposes a ceiling on the fiscal deficit when the sovereign debt (spread) is above a threshold. For our benchmark calibration, similar gains can be achieved with the optimal debt or spread brake. However, for a "Union" of heterogeneous economies, a common spread brake generates larger gains than a common debt brake. Furthermore, gains from abandoning a common debt brake may be significant for economies that are unnecessarily constrained by the rule. In contrast, abandoning a common spread brake would generate losses for any economy in the Union.
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