Fiscal Policy , Sovereign Risk , and Unemployment ∗
نویسندگان
چکیده
How should fiscal policy be conducted in the presence of default risk? We address this question using a sovereign default model with nominal rigidities. An increase in government spending during a recession stimulates economic activity and reduces unemployment. Because the government lacks commitment to future debt repayments, expansionary fiscal policy increases sovereign spreads, making the fiscal stimulus less desirable. We analyze the optimal fiscal policy and study quantitatively whether austerity or stimulus is optimal during an economic slump.
منابع مشابه
Sovereign risk and the effects of fiscal retrenchment in deep recessions
We analyze the effects of government spending cuts on economic activity in an environment of severe fiscal strain, as reflected by a sizeable risk premium on government debt. Specifically, we consider a “sovereign risk channel,” through which sovereign default risk spills over to the rest of the economy, raising funding costs in the private sector. Our analysis is based on a variant of the mode...
متن کاملWorking Paper No. 11-43 Sovereign Risk and the Effects of Fiscal Retrenchment in Deep Recessions
We analyze the effects of government spending cuts on economic activity in an environment of severe fiscal strain, as reflected by a sizeable risk premium on government debt. Specifically, we consider a “sovereign risk channel,” through which sovereign default risk spills over to the rest of the economy, raising funding costs in the private sector. Our analysis is based on a variant of the mode...
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