I build a model where creditworthy countries may use fiscal austerity to communicate their ability to repay sovereign debt and show that the signaling channel is active only for high levels of asymmetric information. The model generates a negative association between the amount of public...

I build a model where creditworthy countries may use fiscal austerity to communicate their ability to repay sovereign debt and show that the signaling channel is active only for high levels of asymmetric information. The model generates a negative association between the amount of public...

This paper studies the signaling role of fiscal austerity. I construct a model where countries have different ability to commit to raise taxes in the future, which affects their probability to repay their debts. The more able type can reduce debt more than the other type is willing to, thereby...