Sovereign Risk and Belief-Driven Fluctuations in the Euro Area
Author/Editor: Giancarlo Corsetti, Keith Kuester, André Meier, Gernot J Mueller
Release Date: © November, 2013
ISBN
: 978-1-47551-344-8
Stock #: WPIEA2013227
English
Stock Status: On back-order
Languages and formats available
English | French | Spanish | Arabic | Russian | Chinese | Portuguese | |
Paperback | Yes | ||||||
Yes |
Description
Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.” The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent selffulfilling debt crises.
Taxonomy
Economic cooperation , Economic policy , Euro area , Fiscal policy , Monetary unions
More publications in this series: Working Papers
More publications by: Giancarlo Corsetti ; Keith Kuester ; André Meier ; Gernot J Mueller