Sovereign Risk, Fiscal Policy, and Macroeconomic Stability

Sovereign Risk, Fiscal Policy, and Macroeconomic Stability
Author :
Publisher : International Monetary Fund
Total Pages : 56
Release :
ISBN-10 : 9781463977078
ISBN-13 : 1463977077
Rating : 4/5 (077 Downloads)

Book Synopsis Sovereign Risk, Fiscal Policy, and Macroeconomic Stability by : Giancarlo Corsetti

Download or read book Sovereign Risk, Fiscal Policy, and Macroeconomic Stability written by Giancarlo Corsetti and published by International Monetary Fund. This book was released on 2012-01-01 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the impact of strained government finances on macroeconomic stability and the transmission of fiscal policy. Using a variant of the model by Curdia and Woodford (2009), we study a "sovereign risk channel" through which sovereign default risk raises funding costs in the private sector. If monetary policy is constrained, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy may become self-fulfilling. In addition, sovereign risk amplifies the effects of negative cyclical shocks. Under those conditions, fiscal retrenchment can help curtail the risk of macroeconomic instability and, in extreme cases, even stimulate economic activity.


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