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Code and data files for "Fiscal Policy and Default Risk in Emerging Markets"

TL;DR: In this article, all Matlab and C++ programs necessary to produce the results of the article were described and a spreadsheet with Mexican data was also provided, along with a spreadsheet containing Mexican data.
Abstract: All Matlab and C++ programs necessary to produce the results of the article. There is also a Excel spreadsheet with Mexican data.
Citations
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Dissertation
04 Jul 2012
TL;DR: In this article, the authors examined the determinants of fiscal procyclicality and sustainability with special reference to the role of fiscal rules, and assessed the impact of both fiscal prosci city and sustainable on economic growth, and found that the introduction of the fiscal rules not only help achieve both countercyclical and sustainable fiscal policy, but also boost economic growth indirectly by stimulating counter-cyclical fiscal policy.
Abstract: A countercyclical fiscal policy combined with sustainable fiscal finances is considered to be one of the most important objectives in modern economic policy. However, procyclical fiscal policy is widely observed in practice, especially in emerging market countries. The main purposes of this thesis are to examine the determinants of fiscal procyclicality and sustainability with special reference to the role of fiscal rules, and to assess the impact of both fiscal procyclicality and sustainability on economic growth. This thesis deals with several new issues on fiscal procyclicality and sustainability which have been ignored in the existing literature. We explore the role of the time coverage of fiscal rules in determining fiscal procyclicality and assess the effect of fiscal procyclicality on economic growth across spending categories and country groups. We also attempt to answer the determinants of fiscal sustainability and the effect of fiscal sustainability on economic growth for the first time. Our empirical analyses yield a number of novel and interesting findings. First, we find that government consumption and investment appear to be procyclical while current transfers appear to be countercyclical in a large number of OECD countries. Second, we find that most OECD countries seem to maintain sustainable fiscal finances and several factors such as the growth rate, the level of development, and aging populations could play a role in determining fiscal sustainability. Third, we find that procyclical current expenditure, especially government consumption and current transfers, could have a negative effect on economic growth, and this negative effect is prominent in emerging market countries. We also find that fiscal sustainability does not seem to play any role in economic growth in tranquil times. Finally, we find that the introduction of fiscal rules not only help achieve both countercyclical and sustainable fiscal policy, but also boost economic growth indirectly by stimulating countercyclical fiscal policy. Multi-year fiscal rules contribute more toward mitigating the level of fiscal procyclicality than annual fiscal rules, and fiscal rules with enforceability, such as the Stability and Growth Pact rules, appear to help maintain sustainable fiscal finances.

13 citations


Additional excerpts

  • ...12 1997; Riascoc and Végh, 2003; Kaminsky, Reinhart, and Végh, 2004; Cuadra, Sanchez, and Sapriza, 2010)....

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Journal ArticleDOI
TL;DR: In this article, the authors evaluated the relationship between the dimensions of creditworthiness and access to finance of small and medium-sized enterprises (SMEs) in Malaysia, with creditworthiness as the mediating variable.
Abstract: The purpose of this study is to empirically assess the relationship between the dimensions of creditworthiness and access to finance of small and medium-sized enterprises (SMEs) in Malaysia, with creditworthiness as the mediating variable. The lack of empirical research on the relationship between creditworthiness and access to finance forms the motivation of this study.,Questionnaires covering various characteristics of the firms, their access to finance and creditworthiness were distributed to a total of 456 SMEs in the Kuala Lumpur and Selangor region for this purpose. A total of 158 responses were returned, of which 145 were usable responses and the relationships are tested using SEM-PLS.,This study finds that an SME and its owner’s character have significant influences on access to finance. An SME’s condition and its ability to provide high quality collateral are found to be highly significant in influencing its access to finance. Capacity is significant but its significance is low, while capital is insignificant. Creditworthiness has a significant positive influence on access to finance.,This study contributes to the important yet under-researched issue of access to finance for SMEs. It highlights the issue of character of applicant as an important dimension of creditworthiness that can significantly influence access to finance for SMEs.

12 citations

Journal ArticleDOI
TL;DR: In this article, the authors study how income inequality affects government borrowing and default decisions and show that increasing income inequality within a country increases the probability of default significantly and that the effect of output shocks is larger than the impact of inequality shocks.

12 citations

Posted Content
01 Jan 2017
TL;DR: In this article, the authors analyze the optimal fiscal policy and study quantitatively whether austerity or stimulus is optimal during an economic slump, concluding that an increase in government spending during a recession stimulates economic activity and reduces unemployment.
Abstract: How should fiscal policy be conducted in the presence of default risk? We address this question using a sovereign default model with downward wage rigidity. An increase in government spending during a recession stimulates economic activity and reduces unemployment. Because the government lacks commitment to future debt repayments, expansionary fiscal policy increases sovereign spreads making the fiscal stimulus less desirable. We analyze the optimal fiscal policy and study quantitatively whether austerity or stimulus is optimal during an economic slump.

12 citations

ReportDOI
TL;DR: In addition to the standard present bias vs default risk tradeoff faced by governments when choosing debt, distortionary policy instruments introduce an intertemporal tradeoff, which may mitigate or exacerbate the incentives to accumulate debt as mentioned in this paper.
Abstract: This paper incorporates fiscal and monetary policies into a model of sovereign default. In addition to the standard present-bias vs default-risk tradeoff faced by governments when choosing debt, distortionary policy instruments introduce an intertemporal tradeoff, which may mitigate or exacerbate the incentives to accumulate debt. Taxation, the money growth rate and currency depreciation all increase with the level of debt. The model reproduces standard business cycle statistics, the response of spreads, inflation and growth to terms-of-trade shocks, and the cyclical properties of fiscal and monetary policies in emerging markets. A counterfactual exercise for Argentina in 2005-2017 suggests that government expansion accounted for the rise in taxes, inflation and currency depreciation and kept output growth low, countering the benign effects of favorable terms of trade.

12 citations

References
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Journal ArticleDOI
TL;DR: In this paper, a public debt theory is constructed in which the Ricardian invariance theorem is valid as a first-order proposition but where the dependence excess burden on the timing of taxation implies an optimal time path of debt issue.
Abstract: A public debt theory is constructed in which the Ricardian invariance theorem is valid as a first-order proposition but where the dependence excess burden on the timing of taxation implies an optimal time path of debt issue. A central proposition is that deficits are varied in order to maintain expected constancy in tax rates. This behavior implies a positive effect on debt issue of temporary increases in government spending (as in wartime), a countercyclical response of debt to temporary income movements, and a one-to-one effect of expected inflation on nominal debt growth. Debt issue would be invariant with the outstanding debt-income ratio and, except for a mirror effect, with the level of government spending. Hypotheses are tested on U.S. data since World War I. Results are basically in accord with the theory. It also turns out that a small set of explanatory variables can account for the principal movements in interest-bearing federal debt since the 1920s.

3,112 citations

Journal ArticleDOI
TL;DR: In this paper, the authors analyze an economy that lacks a strong legal-political institutional infrastructure and is populated by multiple powerful groups, and they show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks.
Abstract: We analyze an economy that lacks a strong legal-political institutional infrastructure and is populated by multiple powerful groups. Powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock. In equilibrium, this leads to slow economic growth and a “voracity effect,” by which a shock, such as a terms of trade windfall, perversely generates a more-than-proportionate increase in fiscal redistribution and reduces growth. We also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks. (JEL F43, O10, O23, O40)

1,426 citations


"Code and data files for "Fiscal Pol..." refers background in this paper

  • ...7 Lane and Tornell (1999) argue that in economies without strong legal and political institutions, a “voracity” effect may take place....

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Journal ArticleDOI
TL;DR: In this paper, the authors construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk-free asset, and calibrate the economy and characterize equilibria computationally.

1,293 citations

Posted Content
TL;DR: In this paper, the empirical relation between the interest rates that emerging economies face in international capital markets and their business cycles was investigated, showing that interest rate shocks alone can explain 50% of output fluctuations and can generate business cycle patterns consistent with the regularities described above and with the major booms and recessions in Argentina in the last two decades.
Abstract: This paper documents the empirical relation between the interest rates that emerging economies face in international capital markets and their business cycles The dataset used in the study includes quarterly data for Argentina during 1983-2000 and for Brazil, Mexico, Korea, and Philippines,during 1994-2000 In this sample, interest rates are very volatile, strongly countercyclical, and strongly positively correlated with net exports Output is very volatile and consumption is more volatile than output These regularities are common to all emerging economies in the sample, butare not observed in a developed economy such as Canada The paper presents a dynamic general equilibrium model of a small open economy, in which (i) firms have to pay for a fraction of the input bill before production takes place, and in which (ii) the labor supply is independent of consumptionUsing a version of the model calibrated to Argentina s economy, we find that interest rate shocks alone can explain 50% of output fluctuations and can generate business cycle patterns consistent with the regularities described above and with the major booms and recessions in Argentina in the last two decades We conclude that interest rates are an important factor for explaining businesscycles in emerging economies and further research should be devoted to fully understand their determination

1,167 citations