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Government spending shocks and default risk in emerging markets

The coronavirus pandemic has revived interest in the effects of fiscal policy. This paper studies the effects of government spending on default risk in emerging economies. We first build a general equilibrium small open economy model where government spending shocks influence external debt and sover...

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Detalles Bibliográficos
Autores principales: Jiang, Ming, Li, Jingchao
Formato: Online Artículo Texto
Lenguaje:English
Publicado: Public Library of Science 2023
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10358995/
https://www.ncbi.nlm.nih.gov/pubmed/37471355
http://dx.doi.org/10.1371/journal.pone.0288802
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author Jiang, Ming
Li, Jingchao
author_facet Jiang, Ming
Li, Jingchao
author_sort Jiang, Ming
collection PubMed
description The coronavirus pandemic has revived interest in the effects of fiscal policy. This paper studies the effects of government spending on default risk in emerging economies. We first build a general equilibrium small open economy model where government spending shocks influence external debt and sovereign bond spreads. We show that external debt piles up and sovereign bond spreads increase following a government spending shock. We then develop VAR evidence based on a panel of 18 countries. We find that in response to a 10% government spending increase, (1) the real effective exchange rate appreciates by 1.0% and the current account to GDP ratio deteriorates by 0.0025 on impact; (2) external debt increases by an average of 3.5% in the year following the shock; and (3) the EMBI Global spread rises by an average of 25 basis points within two years and peaks at 132 basis points 14 quarters after the shock, suggesting a higher sovereign default risk. The empirical results confirm the theoretical predictions from the general equilibrium model.
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spelling pubmed-103589952023-07-21 Government spending shocks and default risk in emerging markets Jiang, Ming Li, Jingchao PLoS One Research Article The coronavirus pandemic has revived interest in the effects of fiscal policy. This paper studies the effects of government spending on default risk in emerging economies. We first build a general equilibrium small open economy model where government spending shocks influence external debt and sovereign bond spreads. We show that external debt piles up and sovereign bond spreads increase following a government spending shock. We then develop VAR evidence based on a panel of 18 countries. We find that in response to a 10% government spending increase, (1) the real effective exchange rate appreciates by 1.0% and the current account to GDP ratio deteriorates by 0.0025 on impact; (2) external debt increases by an average of 3.5% in the year following the shock; and (3) the EMBI Global spread rises by an average of 25 basis points within two years and peaks at 132 basis points 14 quarters after the shock, suggesting a higher sovereign default risk. The empirical results confirm the theoretical predictions from the general equilibrium model. Public Library of Science 2023-07-20 /pmc/articles/PMC10358995/ /pubmed/37471355 http://dx.doi.org/10.1371/journal.pone.0288802 Text en © 2023 Jiang, Li https://creativecommons.org/licenses/by/4.0/This is an open access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/) , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
spellingShingle Research Article
Jiang, Ming
Li, Jingchao
Government spending shocks and default risk in emerging markets
title Government spending shocks and default risk in emerging markets
title_full Government spending shocks and default risk in emerging markets
title_fullStr Government spending shocks and default risk in emerging markets
title_full_unstemmed Government spending shocks and default risk in emerging markets
title_short Government spending shocks and default risk in emerging markets
title_sort government spending shocks and default risk in emerging markets
topic Research Article
url https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10358995/
https://www.ncbi.nlm.nih.gov/pubmed/37471355
http://dx.doi.org/10.1371/journal.pone.0288802
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