Preventing Self-fulfilling debt crises

Michal Szkup

MPRA Paper from University Library of Munich, Germany

Abstract: This paper asks whether a government can implement policies that help to avert a crisis driven by self-fulfilling expectations. I consider two policies that are often at the center of political discussions, namely austerity and fiscal stimulus. I find that under plausible conditions austerity tends to decrease the probability of a debt crisis, while stimulus tends to increase it. I also show that endogenous expectations amplify the effects of government policies so that even a small policy adjustment can have significant effects. Finally, I find that policy uncertainty further increases the attractiveness of austerity versus stimulus, but tends to decrease the overall impact of both policies.

Keywords: sovereign debt crises; expectations; policy uncertainty; taxes; fiscal stimulus (search for similar items in EconPapers)
JEL-codes: D84 F34 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:82754

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