Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264810 
Year of Publication: 
2017
Series/Report no.: 
Working Paper No. 218
Publisher: 
Oesterreichische Nationalbank (OeNB), Vienna
Abstract: 
This paper studies how sovereign risk – both fundamental and self-fulfilling – shapes the cyclical behavior of optimalfiscal policy. We develop a model with endogenous default costs where market sentiment can induce belief-driven debt rollover crises. Optimal taxes and public spending are generally procyclical, but the incidence of rollover risk gives rise to infrequent episodes of severely countercyclicaliscal activity. These endogenous regime changes are associated with pronounced countercyclical changes in the level of debt. Debt buildups are triggered already by relatively mild recessions, but successful fiscal consolidations occur only in exceptionally good times.
Subjects: 
Fiscal policy
sovereign debt
rollover crises
regime switches
JEL: 
E62
F34
H63
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.