Fiscal Rules and the Sovereign Default Premium
IMF Working Papers, January 1, 2012
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- Fiscal Rules and the Sovereign Default Premium
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Bibliographic details
- Authors: Juan Carlos Hatchondo, Francisco Roch, Leonardo Martinez
- Published: January 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463933159.001
Authors and Publication
- By Juan Carlos Hatchondo, Francisco Roch, Leonardo Martinez
- Publication date: January 1, 2012
- Series: Working Paper No. 2012/030
- Issue: 030
- Volume: 2012
- Pages: 28
- DOI: https://doi.org/10.5089/9781463933159.001
- ISBN: 9781463933159
- ISSN: 1018-5941
- Stock No: WPIEA2012030
Research Question and Model
- Objective: Find optimal fiscal rule parameter values and measure the effects of imposing fiscal rules in a default model calibrated to an economy that, in the absence of a fiscal rule, pays a significant sovereign default premium.
- Model features and scenarios analyzed:
- A default model calibrated to an economy with a significant sovereign default premium.
- Case in which the government conducts a voluntary debt restructuring to capture capital gains from the increase in debt market value implied by a rule announcement.
- Analysis of debt ceilings and their effect on policy cyclicality and consumption volatility.
Key Findings
- Optimal fiscal rule parameter values are identified within the calibrated default framework.
- Imposing fiscal rules affects the sovereign default premium and the market value of debt.
- A voluntary debt restructuring can be used by the government to capture capital gains from a rule announcement that increases debt market value.
- Debt ceilings may reduce the procyclicality of fiscal policy and thus reduce consumption volatility.
Policy-Relevant Implications
- Fiscal rules can influence sovereign borrowing costs through their impact on the default premium.
- Announced fiscal rules can alter debt market valuations, creating potential incentives for voluntary debt restructuring by sovereigns.
- Implementing debt ceilings can be a tool to dampen fiscal procyclicality and stabilize consumption.
Subject Tags and Keywords (as listed)
- Subject: Asset and liability management, Debt limits, Fiscal policy, Fiscal rules, National accounts, Personal income, Public debt
- Keywords: announcement debt path, countercyclical policy, debt ceiling, debt dilution, debt exchange, debt level, Debt limits, default, default premium, endogenous borrowing constraints, Europe, fiscal consolidation, fiscal rule, fiscal rules, issued debt, long-term debt, Personal income, rule announcement, sovereign default premium, WP
IMF Working Papers — Fiscal Rules and the Sovereign Default Premium (Working Paper No. 2012/030).