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Fiscal Stimulus under Sovereign Risk / Javier Bianchi, Pablo Ottonello, Ignacio Presno.
- Format:
- Book
- Author/Creator:
- Bianchi, Javier.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w26307.
- NBER working paper series no. w26307
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2019.
- Summary:
- What is the optimal fiscal policy response to a recession when the government is subject to sovereign risk? We study this question in a model of endogenous sovereign default with nominal rigidities. Increasing spending in a recession reduces unemployment, but exposes the government to a debt crisis. We quantitatively analyze this trade-off between stimulus and austerity and find that expanding government spending may be undesirable even in the presence of sizeable Keynesian stabilization gains and inequality concerns. Consistent with these findings, we show that sovereign risk is a key driver of the observed fiscal procyclicality in the data.
- Notes:
- Print version record
- September 2019.
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