Self-Fulfilling Crises in the Eurozone: An Empirical Test

Paul De Grauwe and Yuemei Ji ()

CEPS Papers from Centre for European Policy Studies

Abstract: This paper tests the hypothesis that government bond markets in the eurozone are more fragile and more susceptible to self-fulfilling liquidity crises than in stand-alone countries. We find evidence that a significant part of the surge in the spreads of the PIGS countries (Portugal, Ireland, Greece and Spain) in the eurozone during 2010-11 was disconnected from underlying increases in the debt-to-GDP ratios and fiscal space variables, and was the result of negative self-fulfilling market sentiments that became very strong since the end of 2010. We argue that this can drive member countries of the eurozone into bad equilibria. We also find evidence that after years of neglecting high government debt, investors became increasingly worried about this in the eurozone, and reacted by raising the spreads. No such worries developed in stand-alone countries despite the fact that debt-to-GDP ratios and fiscal space variables were equally high and increasing in these countries.

Pages: 29 pages
Date: 2012-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

Downloads: (external link)
http://www.ceps.eu/system/files/WD%20No%20367%20PD ... ity%20Eurozone_0.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.ceps.eu/system/files/WD%20No%20367%20PDG%20%2526%20YJ%20Empirical%20Test%20Fragility%20Eurozone_0.pdf [301 Moved Permanently]--> https://www.ceps.eu/system/files/WD%20No%20367%20PDG%20%2526%20YJ%20Empirical%20Test%20Fragility%20Eurozone_0.pdf)

Related works:
Journal Article: Self-fulfilling crises in the Eurozone: An empirical test (2013)
Working Paper: Self-fulfilling crises in the Eurozone: an empirical test (2013)
Working Paper: Self-Fulfilling Crises in the Eurozone. An Empirical Test (2012)
Working Paper: Self-Fulfilling Crises in the Eurozone. An Empirical Test (2012)
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:eps:cepswp:7085

Access Statistics for this paper

More papers in CEPS Papers from Centre for European Policy Studies Contact information at EDIRC.
Bibliographic data for series maintained by Margarita Minkova ().