Original Sin and Procyclical Fiscal Policy: Two Sides of the Same Coin?
IMF Working Papers, September 1, 2008
Source details
- Canonical URL
- Original Sin and Procyclical Fiscal Policy: Two Sides of the Same Coin?
Other formats
Bibliographic details
- Authors: Gustavo Adler
- Published: September 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451870671.001
Model and mechanisms
- Develops a simple model of sovereign debt where default is possible through two channels: direct repudiation and inflation.
- Default possibilities generate endogenous constraints on:
- the currency composition of public debt, and
- the level of public debt.
- Weak monetary institutions are modeled as inability to commit to price stability, which makes inflation default feasible.
Key findings
- Procyclicality of fiscal policy in EMEs can arise as a by-product of the "original sin".
- Both "original sin" and procyclical fiscal policy can be explained by the presence of weak monetary institutions that cannot commit to price stability.
- Strengthening monetary institutions in EMEs would:
- lead the "original sin" to fade away, and
- improve the cyclical properties of fiscal policy.
Policy implications and recommendations
- Reinforce monetary institutions to enhance credibility and commitment to price stability.
- By improving monetary commitment mechanisms, policymakers can reduce reliance on foreign-currency liabilities (addressing "original sin") and mitigate procyclical fiscal behavior.
Publication and metadata
- Author: Gustavo Adler
- Date: September 1, 2008
- Series: Working Paper No. 2008/209
- Issue: 209
- Volume: 2008
- Pages: 27
- DOI: https://doi.org/10.5089/9781451870671.001
- Stock No: WPIEA2008209
- ISBN: 9781451870671
- ISSN: 1018-5941
- Subjects: Currencies, Expenditure, Fiscal policy, Private consumption, Public debt
- Keywords: WP
Source: IMF Working Papers — "Original Sin and Procyclical Fiscal Policy: Two Sides of the Same Coin?" by Gustavo Adler (September 1, 2008).