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    Revisiting the fiscal theory of sovereign risk from a DSGE viewpoint

    Okano, E. and Inagaki, K. (2019) Revisiting the fiscal theory of sovereign risk from a DSGE viewpoint. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    We revisit Uribe’s[32] ‘fiscal theory of sovereign risk,’ which suggests a trade-off between stabilizing inflation and suppressing default. Unlike Uribe[32], we develop a class of dynamic stochastic general equilibrium models in which the fiscal surplus is endogenous, but where the default mechanism follows Uribe[32] with nominal rigidities. We find that an optimal monetary and fiscal policy, in which both the nominal interest rate and the tax rate are policy instruments, not only stabilizes inflation and the output gap, but also default through stabilizing the fiscal surplus. Thus, there is not necessarily a trade-off between stabilizing inflation and suppressing default.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BCAM Working Paper Series 1901. ISSN 1745-8587
    Keyword(s) / Subject(s): Sovereign Risk, Optimal Monetary Policy, Fiscal Theory of the Price Level
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Administrator
    Date Deposited: 24 Jul 2019 12:05
    Last Modified: 06 Aug 2019 02:18
    URI: http://eprints.bbk.ac.uk/id/eprint/28256

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