Expected sovereign defaults and fiscal consolidations

Author (Corporate)
Series Title
Series Details No.479, April 2013
Publication Date April 2013
ISBN 978-92-79-28561-5
ISSN 1725-3187
EC KC-AI-13-479-EN-N
Content Type ,

This paper uses a two region DSGE model for the Euro area (periphery vs. core), to analyse the costs of higher sovereign risk premia, the so called 'sovereign risk channel'. We highlight the importance of valuation effects of sovereign bonds in bank balance sheets for the transmission of sovereign default expectations to the private sector.

While at the current juncture the fiscal multiplier is larger in the EA periphery, we show that for highly indebted countries in the EA no fiscal consolidation could have more detrimental effects if it leads to expectations of sovereign default.

Source Link Link to Main Source http://ec.europa.eu/economy_finance/publications/economic_paper/2013/ecp479_en.htm
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