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Exit expectations and debt crises in currency unions

Alexander Kriwoluzky, Gernot Müller and Martin Wolf ()

No 10817, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Membership in a currency union is not irreversible. Expectations of exit may emerge during a sovereign debt crisis, because by exiting countries can redenominate and reduce their liabilities. This possibility alters the dynamics of sovereign debt crises. We establish this formally within a small open economy model of changing policy regimes. The model permits explosive dynamics of debt and sovereign yields inside the currency union and allows us to distinguish between exit expectations and those of an outright default. By estimating the model on Greek data, we quantify the contribution of exit expectations to the crisis dynamics during 2009-2012.

Keywords: currency union; euro crisis; exit; fiscal policy; redenomination premium; regime-switching model; sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: E41 E52 E62 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
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Journal Article: Exit expectations and debt crises in currency unions (2019) Downloads
Working Paper: Exit Expectations and Debt Crises in Currency Unions (2015) Downloads
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