Original Sin and Procylical Fiscal Policy: Two Sides of the Same Coin?

September 1, 2008

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Format: Chicago

Gustavo Adler. Original Sin and Procylical Fiscal Policy: Two Sides of the Same Coin?, (USA: International Monetary Fund, 2008) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper develops a simple model of sovereign debt where default both through direct repudiation and through inflation are possible and give rise to (endogenous) constraints on the currency composition and the level of public debt. This set up allows to show that procyclicality of fiscal policy in EMEs can arise as a by-product of the "original sin" and both can be explained by the presence of weak monetary institutions which cannot commit to price stability. The paper suggests that, as monetary institutions in EMEs strengthen, the "original sin" would fade away and the cyclical properties of fiscal policy would improve.

Subject: Currencies, Expenditure, Fiscal policy, Private consumption, Public debt

Keywords: WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/209
Stock No:

WPIEA2008209
ISBN:

9781451870671
ISSN:

1018-5941

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