Sovereign Risk, Fiscal Policy, and Macroeconomic Stability

Download or Read eBook Sovereign Risk, Fiscal Policy, and Macroeconomic Stability PDF written by Giancarlo Corsetti and published by International Monetary Fund. This book was released on 2012-01-01 with total page 56 pages. Available in PDF, EPUB and Kindle.
Sovereign Risk, Fiscal Policy, and Macroeconomic Stability
Author :
Publisher : International Monetary Fund
Total Pages : 56
Release :
ISBN-10 : 9781463977078
ISBN-13 : 1463977077
Rating : 4/5 (78 Downloads)

Book Synopsis Sovereign Risk, Fiscal Policy, and Macroeconomic Stability by : Giancarlo Corsetti

Book excerpt: This paper analyzes the impact of strained government finances on macroeconomic stability and the transmission of fiscal policy. Using a variant of the model by Curdia and Woodford (2009), we study a "sovereign risk channel" through which sovereign default risk raises funding costs in the private sector. If monetary policy is constrained, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy may become self-fulfilling. In addition, sovereign risk amplifies the effects of negative cyclical shocks. Under those conditions, fiscal retrenchment can help curtail the risk of macroeconomic instability and, in extreme cases, even stimulate economic activity.


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