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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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Journal ArticleDOI
Yui Suzuki1
TL;DR: This paper developed a dynamic stochastic general equilibrium model to account for the differences in fiscal policy stance over the business cycle between developed and emerging market countries, and, in particular, for the volatile and procyclical government consumption and transfer payment in emerging markets.
Abstract: This study develops a dynamic stochastic general equilibrium model to account for the differences in fiscal policy stance over the business cycle between developed and emerging market countries, and, in particular, for the volatile and procyclical government consumption and transfer payment in emerging market countries. Two models with and without default option in sovereign borrowings replicate the contrasting cyclical behaviors indicating that the default option is responsible for procyclical fiscal policy. Further, augmented model with third-party bailouts, together with the stochastic trend income process, successfully predicts high volatilities of fiscal expenditures. These imply that procyclical fiscal policy, entailed by default option, may exacerbate the business cycle in emerging market countries.

5 citations


Additional excerpts

  • ...Moreover, Cuadra, Sanchez, and Sapriza (2010) study joint response of government consumption and consumption tax rates (but not transfer payments) by constructing endogenous default model similar to the one in this paper, however, they exclusively focus on procyclical policy in developing countries…...

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Journal ArticleDOI
09 Feb 2019
TL;DR: In this article, the authors employ the dynamic fixed effects model to determine the key drivers of sovereign bond spreads in African countries and find that country-specific effects are fixed and the inclusion of dummy variables using the Bai-Perron multiple structural break test is significant at a 5% level.
Abstract: This paper investigates the determinants of the sovereign risk premium in African countries. We employ the dynamic fixed effects model to determine the key drivers of sovereign bond spreads. Country-specific effects are fixed and the inclusion of dummy variables using the Bai–Perron multiple structural break test is significant at a 5% level. For robustness, the time-series generalized method of moments (GMM) is used where the null hypothesis of the Sargan Test of over-identifying restrictions (OIR) and the Arellano–Bond Test of no autocorrelation are not rejected. This implies that the instruments used are valid and relevant. In addition, there is no autocorrelation in the error terms. Our results show that the exchange rate, Money supply/GDP (M2/GDP) ratio, and trade are insignificant. Furthermore, our findings indicate that public debt/GDP ratio, GDP growth, inflation rate, foreign exchange reserves, commodity price, and market sentiment are significant at a 5% and 10% level.

5 citations

08 Jan 2010
TL;DR: In this paper, the authors measure the effects of debt dilution on sovereign default risk and show how these effects can be mitigated with debt contracts promising borrowing-contingent payments.
Abstract: We measure the effects of debt dilution on sovereign default risk and show how these effects can be mitigated with debt contracts promising borrowing-contingent payments First, we calibrate a baseline model a la Eaton and Gersovitz (1981) to match features of the data In this model, bonds' values can be diluted Second, we present a model in which sovereign bonds contain a covenant promising that after each time the government borrows it pays to the holder of each bond issued in previous periods the difference between the bond market price that would have been observed absent current-period borrowing and the observed market price This covenant eliminates debt dilution by making the value of each bond independent from future borrowing decisions We quantify the effects of dilution by comparing the simulations of the model with and without borrowing-contingent payments We find that dilution accounts for 84% of the default risk in the baseline economy Similar default risk reductions can be obtained with borrowing-contingent payments that depend only on the bond market price Using borrowing-contingent payments is welfare enhancing because it reduces the frequency of default episodes

5 citations

Journal ArticleDOI
TL;DR: In this article, the authors developed a sovereign default model with endogenous nonlinear taxation and heterogeneous labor to quantify the effect of income inequality and worker migration on sovereign default risk, and they found that the government chooses the optimal combination of taxation and debt, considering its impact on workers' labor and migration decisions.
Abstract: Income inequality and worker migration significantly affect sovereign default risk. Governments often impose progressive taxes to reduce inequality, which redistribute income but discourage labor supply and induce emigration. Reduced labor supply and a smaller high-income workforce erode the current and future tax base, reducing the government's ability to repay debt. I develop a sovereign default model with endogenous non-linear taxation and heterogeneous labor to quantify this effect. In the model, the government chooses the optimal combination of taxation and debt, considering its impact on workers' labor and migration decisions. With the estimated model, I find that income inequality and its interactions with migration explain one-third of the average U.S. state government spread.

5 citations

Journal ArticleDOI
TL;DR: In this article, a quantitative model of news and sovereign debt default with endogenous maturity choice is presented, showing that a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity, suggesting that news about future economic developments may play an important role in these episodes.

5 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