Sovereign Risk and Belief-Driven Fluctuations in the Euro Area
IMF Working Papers, November 6, 2013
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Bibliographic details
- Authors: Giancarlo Corsetti, Keith Kuester, Andre Meier, Gernot J. Mueller
- Published: November 6, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475513448.001
Summary and core findings
- Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well.
- The paper proposes a New Keynesian model of a two-region monetary union that accounts for a “sovereign risk channel.”
- The model is calibrated to the euro area as of mid-2012.
- Key modeled result: a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns.
- Policy implication from the model: coordinated, asymmetric fiscal stances can help prevent self-fulfilling debt crises.
Model, calibration, and mechanisms
- Model type: New Keynesian model of a two-region monetary union.
- Calibration target: euro area as of mid-2012.
- Transmission mechanism emphasized: “sovereign risk channel” linking sovereign risk premia to private-sector credit spreads and macroeconomic dynamics.
- Risk scenario highlighted: belief-driven deflationary downturns triggered or amplified by sovereign risk combined with procyclical fiscal policy.
Policy recommendations and implications
- Favor coordinated fiscal policies across the monetary union to mitigate contagion from sovereign risk.
- Advocate asymmetric fiscal stances across regions as a tool to prevent self-fulfilling debt crises and belief-driven downturns.
- Implicit recommendation: avoid strongly procyclical fiscal policies at the aggregate level that increase vulnerability to belief-driven deflationary episodes.
Publication metadata and key statistics
- Authors: Giancarlo Corsetti, Keith Kuester, Andre Meier, Gernot J. Mueller
- Date: November 6, 2013
- Series: Working Paper No. 2013/227
- Issue: 227
- Volume: 2013
- Pages: 49
- DOI: https://doi.org/10.5089/9781475513448.001
- Stock No: WPIEA2013227
- ISBN: 9781475513448
- ISSN: 1018-5941
Subjects and keywords
- Subject: Expenditure, Fiscal policy, Fiscal stance, National accounts, Public debt, Return on investment
- Keywords: Belief-Driven fluctuation, copyright page, debt level, economic activity, euro area, Fiscal stance, Global, government debt, monetary union, pooling of sovereign risk, Return on investment, risk pooling, risk premium, sovereign risk, Sovereign risk channel, stressed economy, transmission mechanism, WP, zero lower bound
Source: Sovereign Risk and Belief-Driven Fluctuations in the Euro Area — https://www.imf.org/en/publications/wp/issues/2016/12/31/sovereign-risk-and-belief-driven-fluctuations-in-the-euro-area-41038