Sovereign Spreads and the Effects of Fiscal Austerity

Arbeitspapier

I analyze the impact of austerity on sovereign spreads. To do so I propose a model with strategic sovereign default and nominal rigidities where the government follows fiscal rules, which are estimated from data. I first analyze the theoretical implications of the model and find that austerity can be self-defeating only when austerity packages are persistent and the economy is expected to be in a recession with high fiscal multipliers. I then calibrate the model using data from Spain and estimate the size and impact of fiscal policy shocks associated with austerity policies. I use the model to predict what would have happened to spreads and economic activity if Spain had continued to follow the pre-2010 fiscal rule instead of switching to the austerity track. I find that, relative to the counter-factual, austerity decreased sovereign spreads and debt-to-GDP ratios even when fiscal multipliers where higher than one during 2010-2013. Overall, the results indicate that the likelihood of facing self-fulfilling austerity episodes depends on the magnitude of fiscal multipliers but is generally low.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2020-06

Classification and Topics

• Classification: Wirtschaft ; International Lending and Debt Problems ; Fiscal Policy
• Subject: Austerity ; Sovereign Default

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Anzoategui, Diego
• Event: Veröffentlichung
• (who): Rutgers University, Department of Economics
• (where): New Brunswick, NJ
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/246487
• Last update: 10.03.2025, 11:44 AM CET