Sovereign default risk premia, fiscal limits and fiscal policy

Arbeitspapier

We develop a closed economy model to study the interactions among sovereign risk premia, fiscal limits, and fiscal policy. The stochastic fiscal limits, which measure the ability and willingness of the government to service its debt, arise endogenously from a dynamic Laffer curve. The distribution of fiscal limits is country-specific, depending on the size of the government, the degree of countercyclical policy responses, economic diversity, and political uncertainty, among other characteristics. The model rationalizes different sovereign ratings across developed countries. A nonlinear relationship between sovereign risk premia and the level of government debt, which emerges in equilibrium, is consistent with the empirical evidence that once risk premia begin to rise, they do so rapidly. Movements in default risk premia for long-term bonds precede those for shortterm bonds, providing early warnings of increasing probabilities of sovereign defaults.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Working Paper ; No. 2011-10

Classification and Topics

• Classification: Wirtschaft ; Fiscal Policy ; Fiscal Policies and Behavior of Economic Agents: General ; National Budget, Deficit, and Debt: General
• Subject: Fiscal policy ; International topics ; Öffentliche Schulden ; Zahlungsunfähigkeit ; Risikoprämie ; Finanzpolitik ; Laffer-Kurve ; Industriestaaten

Contributors, Location and Time

• Event: Geistige Schöpfung
• (who): Bi, Huixin
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2011

Further information

• DOI: doi:10.34989/swp-2011-10
• Handle: http://hdl.handle.net/10419/53957
• Last update: 10.03.2025, 11:44 AM CET