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Self-fulfilling debt crises, fiscal policy and investment

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dc.affiliation.dptoUC3M. Departamento de Economíaes
dc.contributor.authorGalli, Carlo
dc.date.accessioned2022-06-29T13:12:10Z
dc.date.available2023-07-01T23:00:05Z
dc.date.issued2021-07-01
dc.description.abstractThis paper studies the circular relationship between sovereign credit risk, government fiscal and debt policy, and output. I consider a sovereign default model with fiscal policy and private capital accumulation. I show that, when fiscal policy responds to borrowing conditions in the sovereign debt market, multiple equilibria exist where the expectations of lenders are self-fulfilling. In the bad equilibrium, pessimistic beliefs make sovereign debt costly. The government substitutes borrowing with taxation, which depresses private investment and future output, increases default probabilities and verifies lenders' beliefs. This result is reminiscent of the European debt crisis of 2010–12: while recessionary, fiscal austerity may be the government best response to excessive borrowing costs during a confidence crisis. The extent of this type of crises can be reduced by the intervention of an external official lender committing to provide liquidity, or by policies aimed at sustaining private investment.en
dc.identifier.bibliographicCitationGalli, C. (2021). Self-fulfilling debt crises, fiscal policy and investment. Journal of International Economics, 131, p. 103475.es
dc.identifier.doihttps://doi.org/10.1016/j.jinteco.2021.103475
dc.identifier.issn0022-1996
dc.identifier.publicationtitleJOURNAL OF INTERNATIONAL ECONOMICSen
dc.identifier.publicationvolume131es
dc.identifier.urihttps://hdl.handle.net/10016/35332
dc.identifier.uxxiAR/0000028772
dc.language.isoenges
dc.publisherElsevieres
dc.rights© Elsevier, 2021es
dc.rightsAtribución-NoComercial-SinDerivadas 3.0 España*
dc.rights.accessRightsopen accessen
dc.rights.urihttp://creativecommons.org/licenses/by-nc-nd/3.0/es/*
dc.subject.ecienciaEconomíaes
dc.subject.ecienciaPolíticaes
dc.subject.jelE44
dc.subject.jelE62
dc.subject.jelF34
dc.subject.jelG12
dc.subject.otherFiscal austerityen
dc.subject.otherMultiple equilibriaen
dc.subject.otherSelf-fulfilling debt crisesen
dc.subject.otherSovereign defaulten
dc.titleSelf-fulfilling debt crises, fiscal policy and investmenten
dc.typeresearch article*
dc.type.hasVersionAM*
dspace.entity.typePublication
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