Sovereign Risk and Belief-Driven Fluctuations in the Euro Area

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

No 2013/227, IMF Working Papers from International Monetary Fund

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 selffulfilling debt crises.

Keywords: WP; government debt; debt level; economic activity; Sovereign risk channel; monetary union; euro area; zero lower bound; risk premium; pooling of sovereign risk; stressed economy; risk pooling; transmission mechanism; Fiscal stance; Return on investment; Global; sovereign risk; copyright page; Belief-Driven fluctuation (search for similar items in EconPapers)
Pages: 49
Date: 2013-11-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=41038 (application/pdf)

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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2013/227

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().