Sovereign Debt and the Effects of Fiscal Austerity

Diego Anzoategui

No 441, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: I study the impact of austerity programs implemented in the Eurozone since 2010. To do so I incorporate strategic sovereign default into a DSGE model where the government follows fiscal rules, which are estimated from data. I calibrate the model using data from Spain and estimate the size and impact of scal policy shocks associated with austerity policies. I then use the model to predict what would have happened to output, consumption, employment, sovereign debt levels and spreads if Spain had continued to follow the pre-2010 fiscal rule instead of switching to the austerity track. I find that, contrary to the expectations of policy makers at the time, austerity did not decrease sovereign spreads or debt-to-GDP ratios during 2010-2013. Furthermore it had a negative impact on employment and GDP. Nevertheless, the short run pain is related to a long run gain. The model predicts that as a consequence of austerity Spain is more likely to show lower levels of debt and spreads in the future.

Date: 2019
New Economics Papers: this item is included in nep-dge and nep-eec
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:441

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