Posted Content•
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
More filters
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
More filters
Posted Content•
TL;DR: In this article, the authors combine three international datasets containing information on the political leanings of the ruling government, sovereign debt yields, and key macroeconomic quantities, and build a sovereign default model in which elections determine which one of two politically heterogeneous policy makers will be in charge of the government.
Abstract: We combine three international datasets containing information on the political leanings of the ruling government, sovereign debt yields, and key macroeconomic quantities. This yields new stylized facts regarding the influence of the political leanings of a country's government on their international borrowing costs as well as on fiscal policy. First, left wing governments, on average, pay 134 basis points more than right wing governments to borrow on international debt markets. Second, interest rates on left-wing government debt are 50 percent more volatile than their right-wing counterparts and 40 percent less negatively correlated with output. Third, government spending is very highly correlated with GDP with left governments showing a lower positive correlation and much less volatility than right wing governments. We proceed to build a sovereign default model in which elections determine which one of two politically heterogeneous policy makers will be in charge of the government. When the two policy makers differ in the marginal impact of their fiscal choices on their re-election probabilities, our model delivers the above-mentioned features of the data. In addition, in keeping with the data, right-wing governments display lower tax rates and government consumption to GDP shares than left-wing governments in our calibrated model. Left governments systematically default at higher income levels than right governments leading to political default events when the left replaces the right as well as higher average borrowing costs for the left government. The model implies that re-election probabilities are increasing in good times. These results are obtained without assuming any differences in the preferences of the two types of policy makers.
2 citations
Dissertation•
01 Jan 2014
TL;DR: In this paper, the authors present three essays that deal with macroeconomic topics and are linked by a common method, the computational experiment, which gives answers to quantitative questions on the post-war U.S. macroeconomy.
Abstract: This dissertation consists of three essays that deal with macroeconomic topics and are linked by a common method, the computational experiment. The essays give answers to quantitative questions on the post-war U.S. macroeconomy. Two
essays evaluate episodes of contemporary economic policy: namely, the role of the Ford/Carter deregulation for the productivity growth resurgence in the early 1990s and the contribution of the Taxpayer Relief Act of 1997 to the housing boom of the 2000s. Another essay deals with the connection between business cycle
fluctuations and economic growth during the post-war period. The essay also contributes to a discussion about policy proposals of countercyclical R&D subsidies.
2 citations
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.
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.
2 citations
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.
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.
2 citations
Posted Content•
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.
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
2 citations