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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.
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TL;DR: In this paper, a small-scale macroeconomic model of the New Keynesian type was developed to rationalize the evidence that those economies with relatively better economic fundamen- tals were able to implement countercyclical policies.
Abstract: exico Abstract: Emerging economies have been subject to abrupt reversals in capital inflows, which have adverse consequences for economic activity and financial stability. An important question for policymakers is how to respond to a sudden loss of external financing and its negative effects on the domestic economy. The experience of emerging economies through the recent financial crisis shows that those economies with relatively better economic fundamen- tals were able to implement countercyclical policies. This paper provides a simple analytical framework to rationalize this evidence. In particular, it addresses this issue by developing a small-scale macroeconomic model of the New Keynesian type. Numerical exercises illustrate how both credible monetary and fiscal policies increase policymakers' degrees of freedom to
4 citations
TL;DR: This article developed a micro-founded global games model of debt crises and used this model to study which policies can help to prevent expectations-driven crises and how the desirability of such policies depends on market participants' expectations and the presence of economic policy uncertainty.
3 citations
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TL;DR: In this paper, the authors proposed a model to study how conditional lending and immediate liquidity provision affect incentives for fiscal adjustment in a country facing the risk of sovereign default. And they found that in the fraction of lending provided under conditionalities, a large cost of tight fiscal policy shifts the balance towards immediate liquidity provisions.
Abstract: This paper proposes a model to study how conditional lending and immediate liquidity provision affect incentives for fiscal adjustment in a country facing the risk of sovereign default. Conditional lending provides explicit incentives for fiscal adjustment but immediate liquidity provision is more effective in reducing liquidation costs. For some parameters, immediate liquidity provision induces fiscal adjustment and debt repayment, while conditional lending does not (and vice-versa). Incentives for fiscal adjustment are concave in the fraction of lending provided under conditionalities. A large cost of tight fiscal policy shifts the balance towards immediate liquidity provision.
3 citations
10 Mar 2017
TL;DR: In this paper, a systematic review of the literature on the cyclical behavior of fiscal policy along three dimensions: (i) the set of theories, (ii) measurement of cyclicality of the fiscal policy, and (iii) empirical evidence.
Abstract: This thesis covers several issues on fiscal policy behavior, business cycle fluctuations, and labor market outcomes. It goes beyond of the standard axioms by taking the informal economy as a source for shaping economic fluctuations. In fact, several macroeconomic implications of the informal economy link the three, rather independent, essays. Chapter 2 performs a systematic review of the literature on the cyclical behavior of fiscal policy along three dimensions: (i) the set of theories, (ii) measurement of cyclicality of fiscal policy, and (iii) empirical evidence. We observe that fiscal procyclicality in developing countries is a broad regularity whereas fiscal policy is generally countercyclical or acyclical in more developed countries. We find that 36.3% of developed countries follow countercyclical fiscal policy while only 3.5% of developing countries follow such policy pattern. Credit constraints and political economy factors are usually taken to account for fiscal procyclicality, but empirically they explain such procyclicality only about 33.5% and 30.3%, respectively. We argue that the informal sector may also be an explanation in determining fiscal procyclicality; but, to the best of our knowledge, the literature fails to cover for this relationship. Chapter 3 provides a set of business cycle regularities on the informal sector. We estimate the size of the informal sector for 105 countries and summarize the findings with 10 stylized facts and 5 corollaries. We arrive at three key conclusions. First, the size of informal sector is procyclical. Second, informal sector is linked to volatility of GDP. Third, informal sector is positively associated to procyclicality of fiscal policy. Chapter 4 builds a small, open, developing economy DSGE model. It considers three alternative scenarios for financial integration under dual labor market segments. We find that perfectly integrated economies react more smoothly to shocks. We also find that both imperfections on credit markets and the size of the informal sector stand up as sources of volatility in output and increase the degree of procyclical government consumption. The model suggests that external finance premium and the informal sector (which behaves procyclically) work under a complementary relationship. Chapter 5 concludes and provides policy prescriptions and the path for future research.
3 citations
Cites background from "Code and data files for "Fiscal Pol..."
...In addiction to the previous studies, Cuadra et al. (2010) and Suzuki (2015) follow the seminal study on international lending and sovereign default by Eaton and Gersovitz (1981) to rationalize these stylized facts on fiscal variables in developing countries....
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...In Cuadra et al. (2010) market is incomplete in the sense that there is only one period non-contingent bond....
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...For instance, as argued in Cuadra et al. (2010), governments in developed countries issue a wider range of type of assets than governments in developing countries....
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References
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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
2,337 citations
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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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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
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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