Working Paper: NBER ID: w9221
Authors: MartÃn Uribe
Abstract: This paper presents a fiscal theory of sovereign risk and default. Under certain monetary-fiscal regimes, the risk of default, and thus the emergence of sovereign risk premia, are inevitable. The paper characterizes the equilibrium processes of the sovereign risk premium and the default rate under a number of alternative monetary policy arrangements. Under some of the policy environments considered, the expected default rate and the sovereign risk premium are zero although the government defaults regularly. Under other monetary regimes the default rate and the sovereign risk premium are serially correlated and therefore forecastable. Environments are characterized under which delaying default is counterproductive.
Keywords: No keywords provided
JEL Codes: E6; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy specifications (E52) | default rate (E43) |
| government's fiscal deficits (H69) | default rate (E43) |
| default rate (E43) | sovereign risk premium (F34) |
| monetary policy specifications (E52) | sovereign risk premium (F34) |
| government's ability to inflate away debt (E62) | default (Y70) |
| procrastination in addressing fiscal imbalances (H68) | hyperinflation (E31) |
| hyperinflation (E31) | larger eventual default (G33) |
| Taylor rule monetary regime (E52) | expected default rate (E43) |
| Taylor rule monetary regime (E52) | sovereign risk premium (F34) |