Sovereign risk and belief-driven fluctuations in the euro area

Giancarlo Corsetti, Keith Kuester, Andre Meier and Gernot Müller

Journal of Monetary Economics, 2014, vol. 61, issue C, 53-73

Abstract: Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.” The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent self-fulfilling debt crises.

Keywords: Sovereign risk channel; Monetary union; Euro area; Zero lower bound; Risk premium; Pooling of sovereign risk (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (84)

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Related works:
Working Paper: Sovereign risk and belief-driven fluctuations in the euro area (2013)
Working Paper: Sovereign Risk and Belief-Driven Fluctuations in the Euro Area (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:61:y:2014:i:c:p:53-73

DOI: 10.1016/j.jmoneco.2013.11.001

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