Affiliation:
1. University of Western Ontario (email: )
2. International Monetary Fund (email: )
Abstract
We study fiscal rules using a sovereign default model. A debt-brake (spread-brake) rule imposes a ceiling on the fiscal deficit when the sovereign debt (spread) is above a threshold. For our benchmark calibration, similar gains can be achieved with the optimal debt or spread brake. However, for a “Union” of heterogeneous economies, a common spread brake generates larger gains than a common debt brake. Furthermore, gains from abandoning a common debt brake may be significant for economies that are unnecessarily constrained by the rule. In contrast, abandoning a common spread brake would generate losses for any economy in the Union. (JEL E62, F34, F41, H61, H63)
Publisher
American Economic Association
Subject
General Economics, Econometrics and Finance
Cited by
4 articles.
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