Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk

2010 ◽  
Vol 7 (1) ◽  
pp. 7-30 ◽  
Author(s):  
Thomas Laubach
Keyword(s):  
Fiscal Policy ◽  
Interest Rates ◽  
Default Risk ◽  
Sovereign Default ◽  
Sovereign Default Risk

scholarly journals ON THE ROLE OF DEBT MATURITY IN A MODEL WITH SOVEREIGN RISK AND FINANCIAL FRICTIONS

2017 ◽  
Vol 23 (5) ◽  
pp. 2114-2131
Author(s):  
Stéphane Auray ◽  
Aurélien Eyquem
Keyword(s):  
Public Debt ◽  
Default Risk ◽  
Financial Frictions ◽  
Sovereign Default ◽  
Debt Maturity ◽  
Sovereign Risk ◽  
Fiscal Consolidation ◽  
Positive Effects ◽  
Sovereign Default Risk

We develop a model with financial frictions and sovereign default risk wherein the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio.

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