Numerical Fiscal Rules for Economic Unions: the Role of Sovereign Spreads

By Juan Carlos Hatchondo, Leonardo Martinez, Francisco Roch

July 23, 2021

Preview Citation

Format: Chicago

Juan Carlos Hatchondo, Leonardo Martinez, and Francisco Roch. Numerical Fiscal Rules for Economic Unions: the Role of Sovereign Spreads, (USA: International Monetary Fund, 2021) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study gains from introducing a common numerical fiscal rule in a “Union” of model economies facing sovereign default risk. We show that among economies in the Union, there is significant disagreement about the common debt limit the Union should implement: the limit preferred by some economies can generate welfare losses in other economies. In contrast, a common sovereign spread limit results in higher welfare across economies in the Union.

Subject: Asset and liability management, Asset prices, Debt limits, Fiscal policy, Fiscal rules, Prices

Keywords: Asset prices, Debt intolerance, Debt level, Debt limits, Debt-limit rule, Elasticity function, Fiscal rules, Hight-debt-intolerance economy, Limit result

Publication Details

Pages:

16
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/196
Stock No:

WPIEA2021196
ISBN:

9781513584645
ISSN:

1018-5941

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