Modelling Monetary and Fiscal Governance in the Wake of the Sovereign Debt Crisis in Europe

Bodo Herzog

Economies, 2016, vol. 4, issue 2, 1-11

Abstract: This paper analyzes different government debt relief programs in the European Monetary Union. I build a model and study different options ranging from debt relief to the European Stability Mechanism (ESM). The analysis reveals the following: First, patient countries repay debt, while impatient countries more likely consume and default. Second, without ESM loans, indebted countries default anyway. Third, if the probability to be an impatient government is high, then the supply of loans is constrained. In general, sustainable and unsustainable governments should be incentivized differently especially in a supranational monetary union. Finally, I develop policy recommendations for the ongoing debate in the Eurozone.

Keywords: European Monetary Union; debt relief; debt crisis; European Stability Mechanism (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecomi:v:4:y:2016:i:2:p:9-:d:69439

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