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Exit expectations and debt crises in currency unions

Alexander Kriwoluzky, Gernot Müller and Martin Wolf ()

Journal of International Economics, 2019, vol. 121, issue C

Abstract: We study a sovereign debt crisis in a small member state of a currency union. If the country exits the currency union, it may redenominate its liabilities and reduce the real value of debt through depreciation and inflation. We analyze formally how the anticipation of this possibility, “exit expectations”, impact the dynamics of the sovereign debt crisis. First, we show that public debt accumulates faster and sovereign yields increase more strongly because of redenomination risk. Second, we find that exit expectations induce public debt to be stagflationary. Last, we analyze Greek time-series data through the lens of our model and quantify the contribution of exit expectations to the Greek crisis.

Keywords: Currency union; Exit; Sovereign debt crisis; Fiscal policy; Redenomination risk; Euro crisis; Regime-switching model (search for similar items in EconPapers)
JEL-codes: E52 E62 F41 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Exit expectations and debt crises in currency unions (2015) Downloads
Working Paper: Exit Expectations and Debt Crises in Currency Unions (2015) Downloads
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DOI: 10.1016/j.jinteco.2019.103253

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