The authors study the implications of fiscal policy behaviour for sovereign risk in a framework that determines a country's fiscal limit, the point at which, for economic or political reasons, taxes and spending can no longer adjust to stabilize debt. A real business cycle model maps the...

"Standard discussions of flexible inflation targeting as an optimal monetary policy abstract completely from the consequences of monetary policy for the government budget. But at least some of the countries now adopting inflation targeting have substantial difficulty in controlling fiscal...