Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/283996 
Year of Publication: 
2024
Series/Report no.: 
Working Paper No. 2024-01
Publisher: 
Rutgers University, Department of Economics, New Brunswick, NJ
Abstract: 
We study how debt limits can be expansionary in economies facing sovereign risk. We develop a sovereign debt model with capital accumulation, long-term debt, and fiscal rules that features two distortions: debt dilution and a pecuniary externality of private investment on spreads. The optimal debt limit increases capital accumulation due to lower sovereign risk, generating an economic expansion in the long run. Welfare gains are a result of lower sovereign spreads due to expectations about future borrowing and investment. We present evidence of a positive (negative) relation between debt limits and investment (spreads), consistent with the predictions of the model.
Subjects: 
Fiscal rules
Sovereign debt
Expansionary fiscal consolidation
JEL: 
F34
F41
Document Type: 
Working Paper

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