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Does Austerity Pay Off?

Benjamin Born1; Gernot J. Müller2; Johannes Pfeifer3

1 Frankfurt School of Finance and Management and CEPR · 2 University of Tübingen and CEPR , · 3 University of Cologne

The Review of Economics and Statistics 2020

We investigate empirically how fiscal shocks—unanticipated and exogenous changes of government consumption growth—affect the sovereign default premium. For this purpose, we assemble a new data set for 38 emerging and developed economies. It contains approximately 3,000 observations for the sovereign default premium and three alternative measures of fiscal shocks. We condition our estimates on whether shocks are positive or negative and initial conditions in terms of fiscal stress. An increase of government consumption barely affects the default premium. A reduction raises the premium if fiscal stress is severe but decreases it if initial conditions are benign.

DOI
10.1162/rest_a_00844
Volume
102 (2)
Pages
323-338
Language
en
Export
BibTeX
Sources
crossref openalex