Premio Anual de Investigación Económica “Dr. Raúl Prebisch”

Fiscal Rules and the Sovereign Default Premium

Francisco Roch

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2018-08-09 - We use a sovereign default model to study the effects of introducing fiscal rules. A debt-brake (spread-brake) rule imposes a ceiling on the government budget balance with the objective of upholding sovereign debt (spread) levels below a threshold. For a single model economy, similar welfare gains can be achieved with either a debt brake of a spread brake. However, for set of heterogeneous economies, a common spread brake generates larger welfare gains than a common debt brake. Even if we could tailor fiscal rules to a single economy, a spread brake would be a better option when there is uncertainty about key characteristics of this economy and these characteristics may change over time.