Optimal fiscal policy and sovereign debt crises

Arbeitspapier

This paper studies how sovereign risk – both fundamental and self-fulfilling – shapes the cyclical behavior of optimalfiscal policy. We develop a model with endogenous default costs where market sentiment can induce belief-driven debt rollover crises. Optimal taxes and public spending are generally procyclical, but the incidence of rollover risk gives rise to infrequent episodes of severely countercyclicaliscal activity. These endogenous regime changes are associated with pronounced countercyclical changes in the level of debt. Debt buildups are triggered already by relatively mild recessions, but successful fiscal consolidations occur only in exceptionally good times.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 218

Classification and Topics

• Classification: Wirtschaft ; Fiscal Policy ; International Lending and Debt Problems ; National Debt; Debt Management; Sovereign Debt
• Subject: Fiscal policy ; sovereign debt ; rollover crises ; regime switches

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Niemann, Stefan ; Pichler, Paul
• Event: Veröffentlichung
• (who): Oesterreichische Nationalbank (OeNB)
• (where): Vienna
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/264810
• Last update: 10.03.2025, 11:45 AM CET