Fiscal Rules and the Sovereign Default Premium

ByJuan Carlos Hatchondo, Francisco Roch, Leonardo Martinez

January 1, 2012

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper finds optimal fiscal rule parameter values and measures the effects of imposing fiscal rules using a default model calibrated to an economy that in the absence of a fiscal rule pays a significant sovereign default premium. The paper also studies the case in which the government conducts a voluntary debt restructuring to capture the capital gains from the increase in its debt market value implied by a rule announcement. In addition, the paper shows how debt ceilings may reduce the procyclicality of fiscal policy and thus consumption volatility.

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

Pages:
28
Volume:
2012
DOI:
https://doi.org/10.5089/9781463933159.001
Issue:
030
Series:
Working Paper No. 2012/030
Stock No:
WPIEA2012030
ISBN:
9781463933159
ISSN:
1018-5941

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