A Fiscal Theory of Sovereign Risk

30 Pages Posted: 20 Sep 2002 Last revised: 29 Oct 2010

See all articles by Martín Uribe

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: September 2002

Abstract

This paper presents a fiscal theory of sovereign risk and default. Under certain monetary-fiscal regimes, the risk of default, and thus the emergence of sovereign risk premia, are inevitable. The paper characterizes the equilibrium processes of the sovereign risk premium and the default rate under a number of alternative monetary policy arrangements. Under some of the policy environments considered, the expected default rate and the sovereign risk premium are zero although the government defaults regularly. Under other monetary regimes the default rate and the sovereign risk premium are serially correlated and therefore forecastable. Environments are characterized under which delaying default is counterproductive.

Suggested Citation

Uribe, Martin, A Fiscal Theory of Sovereign Risk (September 2002). NBER Working Paper No. w9221, Available at SSRN: https://ssrn.com/abstract=332265

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