Sovereign risk, fiscal policy, and macroeconomic stability /

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Bibliographic Details
Imprint:	[Washington, D.C.] : International Monetary Fund, ©2012.
Description:	1 online resource (56 pages) : illustrations
Language:	English
Series:	IMF working paper ; WP/12/33 IMF working paper ; WP/12/33.
Subject:	Country risk -- Econometric models. Economic stabilization -- Econometric models. Fiscal policy. Monetary policy. Country risk -- Econometric models. Economic stabilization -- Econometric models. Fiscal policy. Monetary policy.
Format:	E-Resource Book
URL for this record:	http://pi.lib.uchicago.edu/1001/cat/bib/12499991

Hidden Bibliographic Details
Other authors / contributors:	Corsetti, Giancarlo, author. International Monetary Fund. Monetary and Capital Markets Department, issuing body.
ISBN:	9781463933180 1463933185
Notes:	At head of title: Monetary and Capital Markets Department. Title from PDF title page (IMF Web site, viewed January 26, 2012). Includes bibliographical references.
Summary:	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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