Learning about Debt Crises
No 1602, 2017 Meeting Papers from Society for Economic Dynamics
The European debt crisis of 2008-2014 was marked with a surge in government bond yields on unprecedented scale among developed countries in modern history. The peak of this crisis occurred with a significant lag following the initial shocks to output, even though governments did not undertake the fiscal adjustments necessary to prevent a further increase in default risk. I show that these observations are at odds with the predictions of existing sovereign debt models and propose a new theory that features disaster risk and incomplete information about the country’s economic outlook. In a model calibrated to Portuguese economy, the delay arises endogenously as a result of the markets’ learning process. I support the theory with a dataset of real-time forecasts (private and public) and show that forecast errors were particularly large at the outset of the Great Recession, in line with the model predictions.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1602
Access Statistics for this paper
More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().