Numerical Fiscal Rules for Economic Unions: the Role of Sovereign Spreads
IMF Working Papers, July 23, 2021
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- Numerical Fiscal Rules for Economic Unions: the Role of Sovereign Spreads
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Bibliographic details
- Authors: Juan Carlos Hatchondo, Leonardo Martinez, Francisco Roch
- Published: July 23, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513584645.001
Research question and scope
- Study of gains from introducing a common numerical fiscal rule in a “Union” of model economies facing sovereign default risk.
- Comparison of two types of common rules:
- A common debt limit (debt-limit rule).
- A common sovereign spread limit.
Key findings
- There is significant disagreement among economies in the Union about the common debt limit the Union should implement.
- The debt limit preferred by some economies can generate welfare losses in other economies.
- In contrast, implementing a common sovereign spread limit results in higher welfare across economies in the Union.
Policy implications
- A common sovereign spread limit is a superior coordination device relative to a common debt limit for improving welfare across heterogeneous economies facing sovereign default risk.
- Designing Union-level fiscal rules should account for cross-country disagreement over optimal debt ceilings and consider spread-based constraints as an alternative.
Subjects and keywords
- 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
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- Working Paper