A Fiscal Theory of Sovereign Risk
30 Pages Posted: 20 Sep 2002 Last revised: 14 Mar 2021
There are 2 versions of this paper
Date Written: September 2002
Abstract
This paper presents a fiscal theory of sovereign risk and default. Under certain monetary-fiscal regimes, the risk of default, and thus the emergence of sovereign risk premia, are inevitable. The paper characterizes the equilibrium processes of the sovereign risk premium and the default rate under a number of alternative monetary policy arrangements. Under some of the policy environments considered, the expected default rate and the sovereign risk premium are zero although the government defaults regularly. Under other monetary regimes the default rate and the sovereign risk premium are serially correlated and therefore forecastable. Environments are characterized under which delaying default is counterproductive.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Price Level Determinacy Without Control of a Monetary Aggregate
-
Money and Interest in a Cash-in-Advance Economy
By Robert E. Lucas and Nancy L. Stokey
-
Monetary Policy and Multiple Equilibria
By Jess Benhabib, Stephanie Schmitt-grohé, ...
-
Is the Price Level Determined by the Needs of Fiscal Solvency?
By Matthew B. Canzoneri, Robert E. Cumby, ...
