DP9163 Sovereign default risk and commitment for fiscal adjustment
Author(s): | Carlos Eduardo Gonçalves, Bernardo Guimarães |
Publication Date: | October 2012 |
Keyword(s): | fiscal adjustment, IMF, sovereign debt, sovereign default, time inconsistency |
JEL(s): | F33, F34 |
Programme Areas: | International Macroeconomics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=9163 |
This paper studies fiscal policy in a model of sovereign debt and default. A time-inconsistency problem arises: since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates, debtor countries choose suboptimally low fiscal adjustments. An international lender of last resort, capable of designing an implicit contract that coax debtors into a tougher fiscal stance via the provision of cheap (but senior) lending in times of crisis, can work as a commitment device and improve social welfare.