This research project aims to assess how the rapidly increasing fiscal stress across governments around the world from rising federal deficits and ballooning debt obligations poses a risk to the funding of public sector programs (e.g., public healthcare, social security, defence spending, public infrastructure, etc). In particular, any government default would lead to a significant disruption in these public spending programs and the associated public sector jobs, which would have significant adverse consequences for the economy and the well-being of society. We want to study how fiscal stress and sovereign credit risk in developing countries affect government subsidies for investments in innovative technologies.

This research will measure changes to the fiscal burden by collecting news data at the level of individual legislation for various countries. The researchers will then measure the impact of these changes in expected spending requirements on the distress risks in real time on federal governments using various derivative contracts (credit default swaps, inflation swaps, etc) and using market data of firms most impacted by the government spending programs.

A cut in government spending and subsidies towards entrepreneurs engaging in R&D due to a rise in government borrowing costs from fiscal stress can lead to a contraction in innovation and, ultimately, a slowdown in economic growth. The researchers plan on estimating the model using sovereign credit spreads, macroeconomic and fiscal data, and innovation data. They will quantify these effects of credit shocks on innovation policies in their estimated model both in the short term and at long horizons by running a counterfactual analysis.

A core part of the research design is to build the dataset of government spending news at the level of individual legislation. This data will be useful for future researchers to have a new and granular set of fiscal shocks.