Seigniorage and Sovereign Default: The Response of Emerging Markets to Covid-19

52 Pages Posted: 23 Jul 2020

See all articles by Emilio Espino

Emilio Espino

Institute for Advanced Studies (IHS) - Department of Economics & Finance; Universidad Torcuato Di Tella

Julian Kozlowski

New York University (NYU)

Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Juan M. Sánchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: July, 2020

Abstract

Monetary policy affects the tradeoffs faced by governments in sovereign default models. In the absence of lump-sum taxation, governments rely on both disortionary taxes and seigniorage to finance expenditure. Furthermore, monetary policy adds a time-consistency problem in debt choice, which may mitigate or exacerbate the incentives to accumulate debt. A deterioration of the terms-of-trade leads to an increase in sovereign-default risk and inflation, and a reduction in growth, which are consistent with the empirical evidence for emerging economies. An unanticipated shock resembling the COVID-19 pandemic generates a significant currency depreciation, increased inflation, and distress in government finances.

Keywords: Crises, Default, Sovereign Debt, Exchange Rate, Country Risk, Inflation, Seigniorage, Fiscal Policy, Emerging Markets, Time-consistency, COVID-19

JEL Classification: E52, E62, F34, F41, G15

Suggested Citation

Espino, Emilio and Kozlowski, Julian and Martin, Fernando M. and Sanchez, Juan M., Seigniorage and Sovereign Default: The Response of Emerging Markets to Covid-19 (July, 2020). FRB St. Louis Working Paper No. 2020-017, Available at SSRN: https://ssrn.com/abstract=3648650 or http://dx.doi.org/10.20955/wp.2020.017

Emilio Espino (Contact Author)

Institute for Advanced Studies (IHS) - Department of Economics & Finance ( email )

Stumpergasse 56
A-1060 Vienna
Austria

Universidad Torcuato Di Tella ( email )

Minones 2159
C1428ATG Buenos Aires, 1428
Argentina

Julian Kozlowski

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-7350 (Phone)

Juan M. Sanchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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