{"title":"Revisiting the fiscal theory of sovereign risk from a DSGE viewpoint","authors":"Eiji Okano , Kazuyuki Inagaki , Masataka Eguchi","doi":"10.1016/j.intfin.2024.101953","DOIUrl":null,"url":null,"abstract":"<div><p><span>In this study, we revisit Uribe’s (2006) “fiscal theory of sovereign risk”, which suggests a trade-off between stabilizing inflation and suppressing default. Unlike Uribe (2006), we develop a class of </span>dynamic stochastic general equilibrium models<span> in which the production is endogenous with nominal rigidities but whereby the default mechanism follows Uribe (2006). This marginal change generates the New Keynesian Phillips curve that connects inflation and the output gap. Under the optimal monetary and fiscal (OMF) policy, the nominal interest rate and tax rate are both used as policy instruments. A change in the tax rate stabilizes inflation by stabilizing the output gap. Furthermore, this change in the tax rate stabilizes fiscal surplus. Therefore, a trade-off between stabilizing inflation and suppressing default is mitigated by the OMF policy. Note that the OMF policy is a de facto inflation stabilization policy; thus, the tax rate is viewed as a policy instrument for stabilizing inflation.</span></p></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"91 ","pages":"Article 101953"},"PeriodicalIF":5.4000,"publicationDate":"2024-01-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of International Financial Markets Institutions & Money","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1042443124000192","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
In this study, we revisit Uribe’s (2006) “fiscal theory of sovereign risk”, which suggests a trade-off between stabilizing inflation and suppressing default. Unlike Uribe (2006), we develop a class of dynamic stochastic general equilibrium models in which the production is endogenous with nominal rigidities but whereby the default mechanism follows Uribe (2006). This marginal change generates the New Keynesian Phillips curve that connects inflation and the output gap. Under the optimal monetary and fiscal (OMF) policy, the nominal interest rate and tax rate are both used as policy instruments. A change in the tax rate stabilizes inflation by stabilizing the output gap. Furthermore, this change in the tax rate stabilizes fiscal surplus. Therefore, a trade-off between stabilizing inflation and suppressing default is mitigated by the OMF policy. Note that the OMF policy is a de facto inflation stabilization policy; thus, the tax rate is viewed as a policy instrument for stabilizing inflation.
期刊介绍:
International trade, financing and investments, and the related cash and credit transactions, have grown at an extremely rapid pace in recent years. The international monetary system has continued to evolve to accommodate the need for foreign-currency denominated transactions and in the process has provided opportunities for its ongoing observation and study. The purpose of the Journal of International Financial Markets, Institutions & Money is to publish rigorous, original articles dealing with the international aspects of financial markets, institutions and money. Theoretical/conceptual and empirical papers providing meaningful insights into the subject areas will be considered. The following topic areas, although not exhaustive, are representative of the coverage in this Journal. • International financial markets • International securities markets • Foreign exchange markets • Eurocurrency markets • International syndications • Term structures of Eurocurrency rates • Determination of exchange rates • Information, speculation and parity • Forward rates and swaps • International payment mechanisms • International commercial banking; • International investment banking • Central bank intervention • International monetary systems • Balance of payments.