Fiscal Consolidation and Sovereign Risk in the Euro-zone Periphery

Elton Beqiraj and Massimiliano Tancioni ()

No 167, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: Sovereign and private sector default probabilities are introduced in a monetary model to evaluate whether the consideration of a sovereign risk channel can affect the sizeand sign of fi scal multipliers, an hypothesis recently appeared in the literature. Themodel is estimated using data of EZ peripheral countries. From posterior estimatesand simulations we show that i) the relation between fundamentals, sovereign risk andinterest rate spreads is weak; ii) in the short term, the risk channel operates in a pro-cyclical direction, amplifying the effects of fiscal contractions; iii) the consideration ofa liquidity trap does not reverse this result.

Keywords: default risk; interest rates; fiscal policy; monetary policy; liquidity trap; Bayesianestimation (search for similar items in EconPapers)
JEL-codes: C11 E52 E62 E63 (search for similar items in EconPapers)
Pages: 41
Date: 2014-11
New Economics Papers: this item is included in nep-eec and nep-mac
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