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

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

Posted Content•

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

Gabriel Cuadra, Juan M. Sánchez, Horacio Sapriza

01 Jan 2009-Research Papers in Economics (Review of Economic Dynamics)-

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.

read less

Abstract: All Matlab and C++ programs necessary to produce the results of the article. There is also a Excel spreadsheet with Mexican data.

...read moreread less

Citations

PDF

Open Access

More filters

Lecture Notes International Financial Crises

[...]

Bernardo Guimaraes

01 Jan 2007

TL;DR: This is a compilation of my lecture notes for different courses, influenced by my own personal opinions, to understand the papers it covers.

...read moreread less

Abstract: This is a compilation of my lecture notes for different courses. The choice of topics and the way I present them is influenced by my own personal opinions. It probably contains a few mistakes. It is not sufficient.to understand the papers it covers. Nevertheless, it is useful for my teaching. If you have any comments, suggestions or if you spot any mistakes (or typos), please let me know. If you find it useful for teaching or studying, I will be very glad if you use it and send me an email to let me know.

...read moreread less

2 citations

Additional excerpts

...Φ( θ∗ − x∗ σ )− t = 0 (12) The second equilibrium condition: when θ = θ∗, the fraction of agents that attack the currency is just enough to make the government abandon the peg....
[...]

Journal Article•DOI•

Optimal Procyclical Fiscal Policy Without Procyclical Government Spending

[...]

Ryan Niladri Banerjee¹•Institutions (1)

Bank for International Settlements¹

20 Jul 2010-Social Science Research Network

TL;DR: In this paper, the authors developed a model which optimally generates procyclical fiscal policy while keeping government expenditures acyclical, which enables impatient households to benefit from the lower interest rates in booms by helping the consumer bring consumption forward.

...read moreread less

Abstract: Procyclical fiscal policy can be caused by either procyclical government expenditure, countercyclical taxes or both. The majority of models which try to explain procyclical fiscal policy as the result of optimal policy have procyclical government expenditures. This paper develops a model which optimally generates procyclical fiscal policy while keeping government expenditures acyclical. Instead, taxes are optimally countercyclical. The model uses endogenous sovereign default to generate an environment where interest rates are lower in booms than in recessions. If household's have insufficient access to financial instruments it is optimal for the government to lower taxes and borrow during booms. This enables impatient households to benefit from the lower interest rates in booms by helping the consumer bring consumption forward.

...read moreread less

2 citations

Posted Content•

Welfare Eﬀects of Fiscal Procyclicality: Public Insurance with Heterogeneous Agents

[...]

Alvaro Aguirre

01 Jan 2018

TL;DR: In this article, a welfare analysis of public spending in an economy with heterogeneous agents and incomplete markets is presented, and the main quantitative exercise consists in measuring the gains of switching from the (procyclical) spending path of the typical developing country to an acyclical or countercyclical path.

...read moreread less

Abstract: This paper pursues a welfare analysis of ﬁscal policy, speciﬁcally public spending, in an economy with heterogenous agents and incomplete markets. The main quantitative exercise consists in measuring the gains of switching from the (procyclical) spending path of the typical developing country to an acyclical or countercyclical path. The model emphasizes the role of transfer payments from the government to households in alleviating the costs of idiosyncratic shocks. Since these correlate with aggregate shocks, the way ﬁscal policy is conducted along the business cycle has important welfare eﬀects. I ﬁnd that the costs of procyclicality are relatively large and very heterogeneous. While wealth-rich agents don’t suﬀer from procyclicality, poor agents, being either unemployed or unskilled, lose the most. In terms of life-time consumption equivalents these agents may lose as much as 2% from ﬁscal procyclicality, considering only the fraction of spending that is allocated as transfer payments

...read moreread less

2 citations

Journal Article•DOI•

Fiscal Commitment and Sovereign Default Risk

[...]

Siming Liu¹, Hewei Shen²•Institutions (2)

Shanghai University of Finance and Economics¹, University of Oklahoma²

17 May 2021-Social Science Research Network

TL;DR: In this article, the interaction between fiscal commitment and sovereign default risk in a model with optimal taxation and government spending is studied, and it is shown that committing to an inflexible tax plan is counterproductive: the lack of tax contingency hurts the government's debt sustainability and reduces welfare.

...read moreread less

Abstract: This paper studies the interaction between fiscal commitment and sovereign default risk in a model with optimal taxation and government spending A time-inconsistency problem arises in our framework as the government cannot credibly commit to its future tax policies As a result, it chooses suboptimally low fiscal adjustments and defaults too frequently Introducing a commitment device to future tax policies can mitigate this time-inconsistency problem and improve the government's borrowing opportunities However, such a commitment device also entails a loss of tax contingency that might be costly Our quantitative analysis shows that committing to an inflexible tax plan is counterproductive: the lack of contingency hurts the government's debt sustainability and reduces welfare In contrast, committing to a flexible tax plan that is contingent on future economic conditions can improve debt sustainability by 533% and result in a significant welfare gain

...read moreread less

2 citations

Cites background or result from "Code and data files for "Fiscal Pol..."

...Cuadra et al. (2010) show that in a model with endogenous fiscal policy and sovereign default risk, debt is less useful to the government in smoothing consumption fluctuations, and fiscal policy becomes optimally procyclical....
[...]
...The household’s per-period utility function follows Cuadra et al. (2010):...
[...]
...As in Cuadra et al. (2010), the model predicts a procyclical fiscal policy; that is, the government levies higher tax rates during economic downturns when the default risk makes it difficult to issue bonds in the international financial market. A time-inconsistency problem, as in Gonçalves and Guimaraes (2015), arises in this environment as the government cannot commit to its future fiscal policies. During economic downturns, the government can choose to either levy a high tax rate to repay its debt or default on its debt and avoid levying an overly high tax rate. Setting a higher tax rate provides a stronger incentive for the government to repay. However, a discretionary government makes its default-taxation decision solely based on its debt balance and income realization and disregards the benefit of setting a higher tax rate on default risk. Consequently, the government is reluctant to make fiscal adjustments and defaults too frequently. In equilibrium, the excessive default incidence is priced by foreign creditors and limits the government’s ability to borrow. This time-inconsistency problem creates a role for the government to use commitment devices to alleviate default risk and improve welfare. In this paper, we use the model to assess the value of fiscal commitment that has been promoted extensively after the recent European debt crisis. Specifically, we consider two types of commitment measures: a non-contingent tax commitment and a contingent tax commitment.5 Under the non-contingent tax commitment, the government sets a single tax rate at the time the bond is issued. In the next period, the preset tax rate is implemented, regardless of the government’s default decision and income realizations. In comparison, under the contingent tax commitment, the government commits to a full schedule of tax rates that is contingent on the next-period income. In that sense, the government is more flexible and can customize its tax policy (5)In this paper, we assume commitment devices are always available and evaluate the effects of imposing fiscal commitment on the indebted countries. As discussed in the introduction, such commitment can be achieved by introducing balanced budget rules as domestic laws or building credibility through tough and persistent fiscal stances. In addition, Gonçalves and Guimaraes (2015) argue that a third-party institution such as the IMF can also serve as a commitment device by forcing the debtor countries to implement the planned fiscal adjustments. Moreover, Leeper (2017) points out that many features of conventional fiscal policy entail substantial precommitment: the structure of tax code and social programs are given until changed....
[...]
...This paper builds on the literature that studies fiscal policy in the sovereign default model proposed by Eaton and Gersovitz (1981), Arellano (2008), Cuadra et al. (2010), and Arellano and Bai (2017)....
[...]
...As in Cuadra et al. (2010), the model predicts a procyclical fiscal policy; that is, the government levies higher tax rates during economic downturns when the default risk makes it difficult to issue bonds in the international financial market....
[...]

Book•DOI•

Eurobonds : A Quantitative Analysis of Joint-Liability Debt

[...]

Vasileios Tsiropoulos

16 Sep 2019-Research Papers in Economics

TL;DR: In this paper, the authors assess the consequences of implementing a joint liability debt system in a two-country small open economy model and find that the welfare consequences of this policy proposal hinge critically on the timing of its introduction.

...read moreread less

Abstract: This paper assesses the consequences of implementing a joint liability debt system in a two-country small open economy model. With joint liability a default of one country makes the other participant liable for its debt. The results highlight a trade-off between the contagion risk, in the sense that this instrument may push some member states to default even though they are individually solvent, and cheaper access to credit on average, since lenders are at risk only if no participating sovereign is willing to service the debt. The findings suggest that the welfare consequences of this policy proposal hinge critically on the timing of its introduction: Introducing such instruments at the peak of the Eurozone crisis would have helped the Periphery and harm the Core member states, while its adoption during normal times has the potential to make all participants better-off.

...read moreread less

2 citations

Cites background from "Code and data files for "Fiscal Pol..."

...…of debt dynamics and default in incomplete asset markets models: Eaton & Gersovitz (1981), Aguiar & Amador (2013), Aguiar & Gopinath (2006), Cuadra et al. (2010), Pouzo & Presno (2014), and Yue (2010).4 In fact, the benchmark for comparison is Arellano (2008), which accounts for the…...
[...]

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
…
25
26
27
28
29
30

Collapse

References

PDF

Open Access

More filters

Journal Article•DOI•

On the Determination of the Public Debt

[...]

Robert J. Barro

01 Oct 1979-Journal of Political Economy

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.

...read moreread less

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.

...read moreread less

3,112 citations

Journal Article•DOI•

Debt with Potential Repudiation: Theoretical and Empirical Analysis

[...]

Jonathan Eaton¹, Mark Gersovitz¹•Institutions (1)

Princeton University¹

01 Apr 1981-The Review of Economic Studies

2,337 citations

Journal Article•DOI•

The Voracity Effect

[...]

Aaron Tornell¹, Philip R. Lane²•Institutions (2)

Harvard University¹, Trinity College, Dublin²

01 Mar 1999-The American Economic Review

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.

...read moreread less

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)

...read moreread less

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....
[...]

Journal Article•DOI•

The risk-free rate in heterogeneous-agent incomplete-insurance economies

[...]

Mark Huggett¹•Institutions (1)

University of Illinois at Urbana–Champaign¹

01 Sep 1993-Journal of Economic Dynamics and Control

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.

...read moreread less

1,293 citations

Posted Content•

Business Cycles in Emerging Economies:The Role of Interest Rates

[...]

Pablo Andrés Neumeyer¹, Fabrizio Perri², Fabrizio Perri³, Fabrizio Perri⁴•Institutions (4)

Torcuato di Tella University¹, Economic Policy Institute², New York University³, National Bureau of Economic Research⁴

01 Nov 2001-Social Science Research Network

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.

...read moreread less

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

...read moreread less

1,167 citations