Essays on Fiscal Policy and Sovereign Debt Management

An increasing number of countries have adopted fiscal rules in the last 30 years, but little is known why they have any incentives to do so. In Chapter 1, I analyze the role of a fiscal rule, especially a budget rule, on the likelihood of debt repudiation and the welfare of households. Following the Eaton-Gersovitz sovereign default model, I enrich fiscal features in the model by adding a budget rule. The budget rule ensures that spending cannot increase unless tax revenue increases. If more revenue is generated by issuing debt, taxes do not increase much, reducing government spending. The implicit cost of the rule on government spending lowers the government's incentive to borrow, reducing default risks. A budget rule can improve households' welfare if it addresses inefficiencies from the misaligned incentives of the government when the government does not behave in the best interest of the households.

In the second chapter, in joint with Bryn Battersby and Joao Jalles, we empirically examine the effectiveness of announced government fiscal measures in the context of the COVID-19 pandemic. We build a panel data of fiscal announcements by types, such as above-the-line, below-the-line, and contingent liabilities. Using this newly constructed data set, we show how various types of fiscal announcements dynamically affect the distinctive proxies of economic activities in different income groups. We also evaluate how the effects change depending on the country’s initial conditions. Fiscal announcements influence country spreads, while the results vary by the types of fiscal measures in different income groups. Our findings suggest why it might be critical to evaluate the effect of a fiscal announcement by type rather than the aggregated announcement effect.