Sovereign debt crisis, fiscal consolidation, and active central bankers in a monetary union

Paolo Canofari, Giovanni Di Bartolomeo () and Marcello Messori

No 198, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good which can be undermined by sovereign debt problems in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery.

Keywords: Core-periphery models; Stability in a monetary union; Risk sharing; Monetary union institutions; Unconventional policies (search for similar items in EconPapers)
JEL-codes: E02 E58 E63 E65 (search for similar items in EconPapers)
Pages: 36
Date: 2021-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac, nep-mon and nep-opm
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Related works:
Journal Article: Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union (2023)
Working Paper: Sovereign debt crisis, fiscal consolidation, and active central bankers in a monetary union (2022)
Working Paper: Sovereign debt crisis, fiscal consolidation, and active central bankers in a monetary union (2019)
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