Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/203288
Authors: 
Born, Benjamin
Müller, Gernot J.
Pfeifer, Johannes
Year of Publication: 
2015
Series/Report no.: 
SAFE Working Paper 77
Abstract: 
We ask whether cuts of government consumption lower or raise the sovereign default premium. To address this question, we set up a new data set for 38 emerging and advanced economies which contains quarterly time-series observations for sovereign default premia, government consumption, and output. We find that whether austerity pays off depends on a) initial conditions and b) the time-horizon under consideration. Spending cuts in times of fiscal stress raise default premia, but lower premia in benign times. These findings pertain to the short run. Austerity always pays off in the long run, but particularly so if initial conditions are bad.
Subjects: 
Fiscal policy
austerity
sovereign risk
default premium
local projections
panel VAR
fiscal stress
JEL: 
E62
E43
C32
Document Type: 
Working Paper

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