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University of Pennsylvania

Financial frictions

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Full-Text Articles in Macroeconomics

Fiscal Policy, Default And Emerging Market Business Cycles, Omer K. Parmaksiz Aug 2010

Fiscal Policy, Default And Emerging Market Business Cycles, Omer K. Parmaksiz

Publicly Accessible Penn Dissertations

Developing country fiscal policy outcomes documented in data point to stark differences compared with developed ones. Most prominent difference is the excessive volatility of government consumption and transfer payments and their positive correlation relative to output. This seemingly non-optimal behavior is puzzling since it is in contrast with standard theory prescriptions and likely to contribute to aggregate volatility. To study the possible roots of this I build a model by incorporating a detailed explicit fiscal sector to what is otherwise a standard sovereign default setup. The environment I define is one of incomplete markets that resembles small open developing economies ...