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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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TL;DR: In this paper, a general equilibrium model of both sovereign default and business cycles is proposed, which explains several features of cyclical dynamics around deraults, countercyclical spreads, high debt ratios and key business cycle moments.
Abstract: Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-noc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around deraults, countercyclical spreads, high debt ratios, and key business cycle moments. This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
464 citations
TL;DR: In this article, the authors build a dataset on tax rates for 62 countries for the period 1960-2013 that comprises corporate income, personal income, and value-added tax rates and find that tax policy is a cyclical in industrial countries but mostly procyclical in developing countries.
Abstract: It is well known by now that government spending has typically been procyclical in developing economies but a cyclical or countercyclical in industrial countries. Little, if any, is known, however, about the cyclical behavior of tax rates (as opposed to tax revenues, which are endogenous to the business cycle and hence cannot shed light on the cyclicality of tax policy). The authors build a novel dataset on tax rates for 62 countries for the period 1960-2013 that comprises corporate income, personal income, and value-added tax rates. The authors find that, by and large, tax policy is a cyclical in industrial countries but mostly procyclical in developing countries. Further, tax policy in countries with better institutions and or more integrated with world capital markets tends to be less procyclical or more countercyclical.
142 citations
TL;DR: In this article, the authors extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to stochastically alternate in power, and show that a default episode may be triggered by a change in the type of policymaker in office, and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions.
Abstract: We extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to stochastically alternate in power. We show that a default episode may be triggered by a change in the type of policymaker in office, and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions. Under high political stability, political turnover enables the model to generate a weaker correlation between economic conditions and default decisions, a higher and more volatile spread, and lower borrowing levels after a default episode.
132 citations
TL;DR: In this article, the authors identify critical flaws in the traditional approach to evaluate debt sustainability, and examine three alternative approaches that provide useful econometric and model-simulation tools to analyze debt sustainability.
Abstract: The question of what is a sustainable public debt is paramount in the macroeconomic analysis of fiscal policy. This question is usually formulated as asking whether the outstanding public debt and its projected path are consistent with those of the government's revenues and expenditures (ie, whether fiscal solvency conditions hold). We identify critical flaws in the traditional approach to evaluate debt sustainability, and examine three alternative approaches that provide useful econometric and model-simulation tools to analyze debt sustainability. The first approach is Bohn's nonstructural empirical framework based on a fiscal reaction function that characterizes the dynamics of sustainable debt and primary balances. The second is a structural approach based on a calibrated dynamic general equilibrium framework with a fully specified fiscal sector, which we use to quantify the positive and normative effects of fiscal policies aimed at restoring fiscal solvency in response to changes in debt. The third approach deviates from the others in assuming that governments cannot commit to repay their domestic debt and can thus optimally decide to default even if debt is sustainable in terms of fiscal solvency. We use these three approaches to analyze debt sustainability in the United States and Europe after the sharp increases in public debt following the 2008 crisis, and find that all three raise serious questions about the prospects of fiscal adjustment and its consequences.
110 citations
TL;DR: In this paper, the authors study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies and show that this method necessitates a large number of grid points to avoid generating spurious interestrate movements.
Abstract: We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of grid points to avoid generating spurious interestrate movements. This makes the discrete state technique significantly more inefficient than using Chebyshev polynomials or cubic spline interpolation to approximate the value functions. We show that the inefficiency of the discrete state space technique is more severe for parameterizations that feature a high sensitivity of the bond price to the borrowing level for the borrowing levels that are observed more frequently in the simulations. In addition, we find that the efficiency of the discrete state space technique can be greatly improved by (i) finding the equilibrium as the limit of the equilibrium of the finite-horizon version of the model, instead of iterating separately on the value and bond price functions and (ii) concentrating grid points in asset levels at which the bond price is more sensitive to the borrowing level and in levels that are observed more often in the model simulations. Our analysis is also relevant for the study of other credit markets.
105 citations
References
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TL;DR: In this paper, the authors develop a model of fiscal policy and sovereign default, with corporate default risk, to rationalize the issues of short-term stabilization and debt sustainability of public investment.
6 citations
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TL;DR: In this paper, a model of sovereign debt with limited commitment and imperfect tax enforcement is proposed to explore the consequences of the stylized fact that fiscal policy persistently affects the size of the informal economy, which impacts future fiscal revenues and default risk.
Abstract: The effect of fiscal policy on default risk is mitigated by the response of tax compliance. To explore the consequences of this stylized fact, we build a model of sovereign debt with limited commitment and imperfect tax enforcement. Fiscal policy persistently affects the size of the informal economy, which impacts future fiscal revenues and default risk. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal fiscal policy and leads to costly uctuations in consumption.
6 citations
Posted Content•
01 Jan 2019
TL;DR: In this article, the authors study the impact of austerity programs implemented in the Eurozone since 2010 and find that, contrary to the expectations of policy makers at the time, austerity did not decrease sovereign spreads or debt-to-GDP ratios during 2010-2013.
Abstract: I study the impact of austerity programs implemented in the Eurozone since 2010. To do so I incorporate strategic sovereign default into a DSGE model where the government follows fiscal rules, which are estimated from data. I calibrate the model using data from Spain and estimate the size and impact of scal policy shocks associated with austerity policies. I then use the model to predict what would have happened to output, consumption, employment, sovereign debt levels and spreads if Spain had continued to follow the pre-2010 fiscal rule instead of switching to the austerity track. I find that, contrary to the expectations of policy makers at the time, austerity did not decrease sovereign spreads or debt-to-GDP ratios during 2010-2013. Furthermore it had a negative impact on employment and GDP. Nevertheless, the short run pain is related to a long run gain. The model predicts that as a consequence of austerity Spain is more likely to show lower levels of debt and spreads in the future.
6 citations
Dissertation•
10 Dec 2014TL;DR: In this article, the authors present a survey of the state-of-the-art determinants of the risk of defaut souverain of a sovereign CDS spread and Emerging Market Bond Index Plus (EMBI+).
Abstract: Cette these sur travaux empiriques en quatre articles s’interesse aux determinants de risque de defaut souverain. Le premier chapitre resume l’etat de l’art du risque de defaut souverain et trois principales approches des determinants du risque de defaut souverain: le modele structurel, le modele dynamique stochastique et les modeles econometriques. Le deuxieme chapitre etudie la probabilite de defaut de l’Argentine (2002) en utilisant un modele structurel propose par Gray and Malone 2008. Le troisieme chapitre propose un modele stochastique afin de calculer le spread du credit souverain journalier. Les deux derniers chapitres econometriques determinent deux proxies du risque de defaut souverain: Sovereign CDS spread et Emerging Market Bond Index Plus (EMBI+). Le quatrieme chapitre essaye de determiner le sovereign CDS spread a longterme et court-terme en utilisant trois estimations: Pooled Mean Group, Mean Group et Dynamic Fixed Effect. Dans le dernier chapitre, on applique un modele non-lineaire asymetrique Autoregressif a retards echelonnes pour etudier l’effet d’asymetrie a longterme de compte courant sur l’EMBI+ y compris les variables explicatives telles que la dette exterieure et les reserves internationales pour deux pays emergents: la Turquie et le Bresil.
6 citations
Posted Content•
TL;DR: The authors showed that government expenditures are procyclical in emerging markets and countercyclically in developed economies and this pattern is driven by differences in social transfers: transfers are more countercyclical and make up a larger portion of spending in developing economies.
Abstract: Government expenditures are procyclical in emerging markets and countercyclical in developed economies. We show this pattern is driven by differences in social transfers: transfers are more countercyclical and make up a larger portion of spending in developed economies. We use a small open economy model to study how much these differences in fiscal policies can account for differences in business cycle characteristics of emerging economies, particularly excess volatility of private consumption. We find that ignoring disparate fiscal policy results in an overestimation of the persistence of technology shocks in emerging markets relative to developed by 52%. We study how this conclusion depends on differences in the extent and sources of inequality across countries.
6 citations