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Sovereign Risk and Belief-Driven Fluctuations in the Euro Area

Giancarlo Corsetti, Keith Kuester, Andre Meier and Gernot Mueller
Authors registered in the RePEc Author Service: Gernot J. Müller

No 2013/227, IMF Working Papers from International Monetary Fund

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 selffulfilling debt crises.

Keywords: WP; government debt; debt level; economic activity; Sovereign risk channel; monetary union; euro area; zero lower bound; risk premium; pooling of sovereign risk; stressed economy; risk pooling; transmission mechanism; Fiscal stance; Return on investment; Global; sovereign risk; copyright page; Belief-Driven fluctuation (search for similar items in EconPapers)
Pages: 49
Date: 2013-11-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Sovereign risk and belief-driven fluctuations in the euro area (2014) Downloads
Working Paper: Sovereign risk and belief-driven fluctuations in the euro area (2013) Downloads
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