Sovereign risk, fiscal policy, and macroeconomic stability /

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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