TY  - RPRT
        AU  - Juessen, Falko
AU  - Schabert, Andreas
        TI  - Fiscal Policy, Sovereign Default, and Bailouts
        PY  - 2013/Dec/
        PB  - Institute of Labor Economics (IZA)
        CY  - Bonn
        T2  - IZA Discussion Paper
        IS  - 7805
        UR  - https://www.iza.org/index.php/publications/dp7805
        AB  - This paper examines fiscal policy without commitment and the effects of conditional bailout loans. The government relies on distortionary taxation and decides between full debt repayment and costly default. It tends to overborrow due to myopia, which induces default to be a relevant policy option and provides a rationale to constrain sovereign borrowing. We consider a lump-sum financed fund that offers loans at a favorable price and conditional upon minimum primary surpluses. While the government prefers defaulting in the most adverse states, we find that it is willing to accept conditional loans in close-to-default states. These bailouts can lead to an increase in the mean debt price and a lower default probability that are associated with enhanced household welfare. Yet, these outcomes can be reversed when bailouts are too generous, while public debt never decreases in the long-run when bailout loans are available.
        KW  - discretionary fiscal policy
KW  - overborrowing
KW  - sovereign default
KW  - bailout loans
KW  - conditionality
        ER  -