Sovereign debt, fiscal policy, and macroeconomic instability

Abstract

We study the relation between capital accumulation, fiscal policy, and sovereign debt dynamics in a small open economy. The government maximizes spending, facing borrowing constraints and a conditionality requirement.Debt dynamics are forward looking, being driven by the endogenous borrowing constraint. Current debt is determined by expectations about the government's ability to finance itself in the future, opening the room for indeterminacy. If the government believes it may issue more debt next period, the borrowing constraint relaxes, and current debt increases. The government invests more in productive activities, generating a boom which increases tax revenues. However, as this increase does not repay the additional debt, the government will issue more debt next period, confirming initial expectations. To exclude explosive trajectories, tax revenues must increase enough to repay the outstanding debt and reduce future debt emission. This is possible only with a sufficiently procyclical tax rate. In this case, if productive externalities are large enough, the economy exhibits local and global indeterminacy, as steady-state multiplicity is also obtained.Avoiding sufficiently procyclical tax rates, the government can prevent local and global fluctuations driven by selffulfilling volatile expectations. This differs from the general

Development of the credit market of Ukraine under macroeconomic instability

“…For example, Ahiadorme (2022), Ames et 2023) note that a significant change in external and internal factors makes it necessary to take into account the main macroeconomic trends that directly affect the economy of each country and its stable development. Carli and Modesto (2022) consider the issues of ensuring macroeconomic stability: more attention is paid to the role of fiscal policy and public debt. Khan (2019) describes the impact of macroeconomic instability on environmental development.…”

Dynamics of the Development of the Credit Services Market in the Conditions of Financial Instability: A Case of Ukraine

“…The issues of ensuring macroeconomic stability are discussed in the works of Carli and Modesto [13], where they focus more on the role of fiscal policy and public debt in ensuring macroeconomic stability. Khan [14] describes the impact of macroeconomic instability on environmental development, while Radionova [12,15] validates the characteristic features of the state's economic policy formation under macroeconomic instability.…”