Fiscal Adjustments and the Probability of Sovereign Default

30 Pages Posted: 9 Jan 2015

See all articles by Christoph A. Schaltegger

Christoph A. Schaltegger

University of St. Gallen - CREMA

Martin Weder

University of Lucerne

Date Written: February 2015

Abstract

Based on probit estimates, this paper analyzes the effects of fiscal consolidation on the probability of sovereign default in the short run. Using a panel of 104 developing countries from 1980 to 2009 and controlling for various economic, fiscal and political factors, we find that fiscal adjustments in general do not significantly reduce the probability of default even if they are large. Instead, the composition of budget consolidation is decisive in reducing default risk. Expenditure based adjustments are not successful while revenue based adjustments lower the probability of default in the following year by 36 to 55 percent. This finding also holds when economic growth is low or government debt is high as well as when IMF lending is taken into account.

Suggested Citation

Schaltegger, Christoph A. and Weder, Martin, Fiscal Adjustments and the Probability of Sovereign Default (February 2015). Kyklos, Vol. 68, Issue 1, pp. 81-110, 2015. Available at SSRN: https://ssrn.com/abstract=2547261 or http://dx.doi.org/10.1111/kykl.12074

Christoph A. Schaltegger (Contact Author)

University of St. Gallen - CREMA ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Martin Weder

University of Lucerne

Hofstrasse 9
P.O. Box 7464
Luzern 7, CH - 6000
Switzerland

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