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Fiscal Rules and the Sovereign Default Premium

  • Juan Carlos Hatchondo
  • Leonardo Martinez
  • Francisco Roch
American Economic Journal: Macroeconomics
vol. 14, no. 4, October 2022
(pp. 244-73)
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Abstract

We study fiscal rules using a sovereign default model. A debt-brake (spread-brake) rule imposes a ceiling on the fiscal deficit when the sovereign debt (spread) is above a threshold. For our benchmark calibration, similar gains can be achieved with the optimal debt or spread brake. However, for a "Union" of heterogeneous economies, a common spread brake generates larger gains than a common debt brake. Furthermore, gains from abandoning a common debt brake may be significant for economies that are unnecessarily constrained by the rule. In contrast, abandoning a common spread brake would generate losses for any economy in the Union.

Citation

Hatchondo, Juan Carlos, Leonardo Martinez, and Francisco Roch. 2022. "Fiscal Rules and the Sovereign Default Premium." American Economic Journal: Macroeconomics, 14 (4): 244-73. DOI: 10.1257/mac.20170479

Additional Materials

JEL Classification

  • E62 Fiscal Policy
  • F34 International Lending and Debt Problems
  • F41 Open Economy Macroeconomics
  • H61 National Budget; Budget Systems
  • H63 National Debt; Debt Management; Sovereign Debt
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