We study fiscal rules using a sovereign default model. A debt-brake (spread-brake) rule imposes a ceiling on the fiscal deficit when the sovereign debt (spread) is above a threshold. For our benchmark calibration, similar gains can be achieved with the optimal debt or spread brake. However, for a "Union" of heterogeneous economies, a common spread brake generates larger gains than a common debt brake. Furthermore, gains from abandoning a common debt brake may be significant for economies that are unnecessarily constrained by the rule. In contrast, abandoning a common spread brake would generate losses for any economy in the Union.
Hatchondo, Juan Carlos, Leonardo Martinez, and Francisco Roch.
"Fiscal Rules and the Sovereign Default Premium."
American Economic Journal: Macroeconomics,
International Lending and Debt Problems
Open Economy Macroeconomics
National Budget; Budget Systems
National Debt; Debt Management; Sovereign Debt