Fiscal Policy and Default Risk in Emerging Markets

Cuadra, Gabriel; Sánchez, Juan M.; Sapriza, Horacio

doi:10.2139/ssrn.2188512

Cited by 61 publications

(107 citation statements)

References 48 publications

(26 reference statements)

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“…The first is the literature on fiscal procyclicality. Part of the literature has shown that, in small open economy models with Ricardian households and incomplete assets markets, optimal fiscal policy is generally procyclical (e.g., Gavin et al, 1996;Gavin and Perotti, 1997;Riascos and Végh, 2003;Caballero and Krishnamurthy, 2004;Cuadra, Sanchez and Sapriza, 2010), in line with the evidence collected for most emerging countries. A second strand studies fiscal rules in economies with non-Ricardian households, embedded in the more general literature that contrasts procyclical versus countercyclical fiscal policies.…”

Section: Related Literaturementioning

confidence: 77%

Dealing with the Dutch disease: Fiscal rules and macro-prudential policies

García-Cicco

Kawamura

2015

Journal of International Money and Finance

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license. Terms of use: Documents inFollowing a peer review process, and with previous written consent by the Inter-American Development Bank (IDB), a revised version of this work may also be reproduced in any academic journal, including those indexed by the American Economic Association's EconLit, provided that the IDB is credited and that the author(s) receive no income from the publication. Therefore, the restriction to receive income from such publication shall only extend to the publication's author(s). With regard to such restriction, in case of any inconsistency between the Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives license and these statements, the latter shall prevail.Note that link provided above includes additional terms and conditions of the license.The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.http://www.iadb.org 2015 Abstract 1This paper evaluates from a welfare perspective three policy alternatives for dealing with Dutch disease problems originating from cyclical movements in commodity prices: fiscal rules for government expenditures, capital controls, and taxes on domestic lending. A DSGE model of a small open economy is developed, with a sectoral decomposition that features three distinctive characteristics: financial frictions, a learning-by-doing externality in the industrial sector, and a fraction of households being non-Ricardian (credit constrained). The model is calibrated using Chilean data. For each policy tool, optimal simple rules are analyzed from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shapes the optimal policy design. A general conclusion of the analysis is that the included Dutch disease inefficiencies are of quantitatively limited relevance in analyzing the desirability of these policies from a welfare perspective. JEL Classification: F41, E61

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Section: Related Literaturementioning

confidence: 77%

Dealing with the Dutch disease: Fiscal rules and macro-prudential policies

García-Cicco

Kawamura

2015

Journal of International Money and Finance

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“…This result is by no means new in the literature and it is in fact a consequence of more general capital market imperfections. See Cuadra et al (2010) and Riascos and Végh (2003).…”

Section: Endogenous Costs Of Defaults: Credit Contractionsmentioning

confidence: 99%

Sovereign defaults and banking crises

Sosa‐Padilla

2018

Journal of Monetary Economics

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Episodes of sovereign default feature three key empirical regularities in connection with the banking systems of the countries where they occur: (i) sovereign defaults and banking crises tend to happen together, (ii) commercial banks have substantial holdings of government debt, and (iii) sovereign defaults result in major contractions in bank credit and production. This paper provides a rationale for these phenomena by extending the traditional sovereign default framework to incorporate bankers who lend to both the government and the corporate sector. When these bankers are highly exposed to government debt, a default triggers a banking crisis, which leads to a corporate credit collapse and subsequently to an output decline. When calibrated to the 2001-02 Argentine default episode, the model is able to produce default in equilibrium at observed frequencies, and when defaults occur credit contracts sharply, generating output drops of 7 percentage points, on average. Moreover, the model matches several moments of the data on macroeconomic aggregates, sovereign borrowing, and fiscal policy. The framework presented can also be useful for studying the optimality of fractional defaults. JEL codes: F34, E62

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“…An increase in the savings-investment gap and a reduction in tr_gp therefore makes lnx increase on impact as shown in FIGURE (7). The impact of a single period shock to idiosyncratic risk (u) is shown in …gure (8).…”

Section: Interest Rate Shockmentioning

confidence: 99%

“…In Table 1, we summarize the estimates of the relative standard deviation and contemporaneous correlations of government expenditures (G) and real interest rates (R) for 12 EMEs from Male (2010). 8 In countries for which data is available, …ve countries have counter-cyclical real interest rates, while six have pro-cyclical interest rates. Further, while government expenditure is counter-cyclical in …ve countries, it is pro-cyclical in four.…”

Section: Introductionmentioning

confidence: 99%

Fiscal Policy in an Emerging Market Business Cycle Model

Ghate¹,

Gopalakrishnan²,

Tarafdar³

2015

SSRN Journal

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Emerging market economy business cycles are typically characterized by high consumption and output volatility, strongly counter-cyclical current accounts, and countercyclical real interest rates. Evidence from the wider EME and less developed economy business cycle experience suggests however that real interest rates can also be procyclical. We reconcile the pro-cyclicality of real interest rates with the above facts by embedding …scal policy into a standard emerging market business cycle model. We show that …scal policy makes real interest rates a-cyclical or pro-cyclical. We use the model to replicate qualitatively some of the key features of the Indian business cycle.

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Fiscal Policy and Default Risk in Emerging Markets

Cited by 61 publications

References 48 publications

Dealing with the Dutch disease: Fiscal rules and macro-prudential policies

Dealing with the Dutch disease: Fiscal rules and macro-prudential policies

Sovereign defaults and banking crises

Fiscal Policy in an Emerging Market Business Cycle Model

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