Macroeconomic and policy implications of eurobonds

Cristina Badarau, Florence Huart and Ibrahima Sangaré

International Review of Law and Economics, 2021, vol. 65, issue C

Abstract: This article explores the controversial subject of Eurobonds, by analyzing their economic consequences in an asymmetric monetary union like the Eurozone, where countries differ in size and policy preferences. We thus build a two-country monetary union DSGE model to compare three scenarios of government debt issuance: i) countries issue their own sovereign bonds (the baseline scenario is given the label “National bonds”); ii) countries issue common sovereign bonds without any limitations on the amount they can borrow (this scenario is labelled “Eurobonds”); and iii) there is a cap on the issuance of Eurobonds by each country so that the joint liability is limited (we call this scenario “Limited Eurobonds”). Assuming that a country decides to increase public spending and cares little about debt stabilization, we find that the spending multiplier would be the highest with Eurobonds and the lowest with Limited Eurobonds. The spillover effects on output in the rest of the union would be negative with Eurobonds but positive with Limited Eurobonds. The positive trade channel of the spillover effects is reinforced while the negative financial channel is reduced in the latter scenario. From the perspective of the monetary union as a whole, Limited Eurobonds could bring about higher overall output and produce larger benefits for aggregate household welfare depending upon country size. Altogether, our findings support the case for limited joint liability, especially when the public spending shock originates from a country which is smaller than the rest of the union, but not too small.

Keywords: Eurobonds; “coronabonds”; Sovereign debt; Spillovers; Monetary union (search for similar items in EconPapers)
JEL-codes: E44 E62 F36 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:irlaec:v:65:y:2021:i:c:s0144818820301678

DOI: 10.1016/j.irle.2020.105954

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