We develop a closed economy model in order to study the interactions among sovereign risk premia, fiscal limits and fiscal policy. The stochastic fiscal limit, which measures the ability and willingness of the government to service its debt, arises endogenously from dynamic Laffer Curves. The...

We develop a closed economy model in order to study the interactions among sovereign risk premia, fiscal limits and fiscal policy. Default risk premia reflect the market's expectations about the ability and willingness of the government to service its debt. The government's ability arises...

The paper is organized around the following question: when the economy moves from a debtGDP level where the probability of default is nil to a higher level the "fiscal limit" where the default probability is non-negligible, how do the effects of routine monetary operations designed to achieve...