EconPapers    
Economics at your fingertips  
 

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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (83)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393213001475
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Sovereign risk and belief-driven fluctuations in the euro area (2013) Downloads
Working Paper: Sovereign Risk and Belief-Driven Fluctuations in the Euro Area (2013) Downloads
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:eee:moneco:v:61:y:2014:i:c:p:53-73

DOI: 10.1016/j.jmoneco.2013.11.001

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2024-07-05
Handle: RePEc:eee:moneco:v:61:y:2014:i:c:p:53-73