Discretionary fiscal policy and sovereign risk

The quality and magnitude of public spending is a central concern for those who want to have an assessment of the risk implied in the sovereign bonds of a country. In this paper, we investigate the effect that discretionary fiscal policy, measured by the Fiscal Impulse, may have on the sovereign risk. Using data comprising the period from March 2004 to December 2016, we have found evidence that the adoption of discretionary fiscal policies affects the Brazilian sovereign credit risk. Additionally, there is evidence that for the period under analysis, the Brazilian sovereign risk was determined by internal factors and not by global conditions.