Sovereign risk and belief-driven fluctuations in the euro area

Giancarlo Corsetti, Müller, Gernot, Keith Kuester and Andre Meier
Authors registered in the RePEc Author Service: Gernot J. Müller

No 9723, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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 self-fulfilling debt crises.

Keywords: Sovereign risk channel; Monetary union; Euro area; Zero lower bound; risk premium; Pooling of sovereign risk (search for similar items in EconPapers)
JEL-codes: E62 F41 F42 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Sovereign risk and belief-driven fluctuations in the euro area (2014)
Working Paper: Sovereign Risk and Belief-Driven Fluctuations in the Euro Area (2013)
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