Government Debt Deleveraging in the EMU

Alexandre Cole (), Chiara Guerello and Guido Traficante

MPRA Paper from University Library of Munich, Germany

Abstract: We evaluate the stabilization properties of several rules and instruments to reduce government debt in a Currency Union, like the EMU. In a two-country New-Keynesian DSGE model, with a debt-elastic government bond spread and incomplete international financial markets, we study the effects of government debt deleveraging, under different scenarios for fiscal policy coordination. We find that greater stabilization is achieved when the two countries coordinate by stabilizing net exports. Moreover, we find that taxes are a better instrument for deleveraging compared to government transfers. Our policy prescriptions for the Euro Area are to reduce government debt less during recessions and liquidity traps, and to do so using distortionary taxes, while concentrating on reducing international demand imbalances.

Keywords: Sovereign Debt; International Policy Coordination; Monetary Union; New Keynesian (search for similar items in EconPapers)
JEL-codes: E12 E63 F42 F45 H63 (search for similar items in EconPapers)
Date: 2023-01-08
New Economics Papers: this item is included in nep-dge, nep-eec and nep-opm
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https://mpra.ub.uni-muenchen.de/115980/1/MPRA_paper_115980.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/116000/1/MPRA_paper_116000.pdf revised version (application/pdf)

Related works:
Journal Article: Government debt deleveraging in the EMU (2023)
Working Paper: Government Debt Deleveraging in the EMU (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:115980

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