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Federal Reserve Bank of Richmond
Working Paper
Fiscal policy and default risk in emerging markets
Gabriel Cuadra
Juan M. Sanchez
Horacio Sapriza
Abstract

Emerging market economies typically exhibit a procyclical fiscal policy: public expenditures rise (fall) in economic expansions (recessions), whereas tax rates rise (fall) in bad (good) times. Additionally, the business cycle of these economies is characterized by countercyclical default risk. In this paper we develop a quantitative dynamic stochastic small open economy model with incomplete markets, endogenous fiscal policy and sovereign default where public expenditures and tax rates are optimally procyclical. The model also accounts for the dynamics of other key macroeconomic variables in emerging economies.


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Gabriel Cuadra & Juan M. Sanchez & Horacio Sapriza, Fiscal policy and default risk in emerging markets, Federal Reserve Bank of Richmond, Working Paper 09-01, 2009.
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Keywords: Business cycles ; Macroeconomics
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