NBER

Ignacio Presno

Board of Governors of Federal Reserve System
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Washington, DC 20551
Tel: 202-721-4514

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Institutional Affiliation: Federal Reserve Board

NBER Working Papers and Publications

September 2019Fiscal Stimulus under Sovereign Risk
with Javier Bianchi, Pablo Ottonello: w26307
The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and provide a model of optimal fiscal policy with nominal rigidities and endogenous sovereign default that can account for this empirical pattern. Financing a fiscal stimulus is costly for risky countries and can render countercyclical policies undesirable, even in the presence of large Keynesian stabilization gains. We also show that imposing austerity can backfire by exacerbating the exposure to default, but a well-designed "fiscal forward guidance" can help reduce the excess procyclicality.

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