Sovereign Default Risk Premia and State-Dependent Twin Deficits

Patrick Hürtgen and Ronald Rühmkorf

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: This paper studies the impact of the state-dependent risk of a government default on the correlation of the scal balance and current account. We use a small open economy model where nonlinear risk premia arise endogenously when the government operates close to its scal limit, i.e. the maximum capacity of a country to repay its debt. The presence of the possible sovereign default leads to dynamics of sovereign debt which cause taxes to rise and increase the dispersion of resulting tax levels. In line with data for industrialized countries household saving increases at high debt-to-GDP levels and the correlation of the scal balance and current account decreases. We calibrate the model to Greece and simulate the debt crisis as a result of negative TFP shocks and nd that the model dynamics t to the data.

JEL-codes: E62 F32 H31 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/79834/1/VfS_2013_pid_861.pdf (application/pdf)

Related works:
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:zbw:vfsc13:79834

Access Statistics for this paper

More papers in VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().