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Debt stabilization games in a monetary union: What are the effects of introducing eurobonds?

Jacob Engwerda (), Bas van Aarle and Tzanis Anevlavis

Journal of Macroeconomics, 2019, vol. 59, issue C, 78-102

Abstract: This paper analyzes how the introduction of Eurobonds affects debt dynamics in a two-country monetary union model. Monetary and fiscal authorities are engaged in dynamic government debt stabilization games in which interest rates on government debt adjust endogenously. Three different equilibria are considered: the non-cooperative Nash open-loop equilibrium, the fiscal coordination equilibrium and the fully cooperative equilibrium. It is shown how the effects of Eurobonds depend on the game-theoretic equilibrium/institutional framework in place, the initial debt levels, policy makers’ concerns with debt stabilization and the strength of financial market discipline.

Keywords: Debt stabilization; Monetary union; Non-linear dynamical systems; Risk premium; Eurobonds (search for similar items in EconPapers)
JEL-codes: C7 C62 E6 F4 H6 (search for similar items in EconPapers)
Date: 2019
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