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Sovereign Risk and Belief-Driven Fluctuations in the Euro Area
Author:
Giancarlo Corsetti null

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Mr. Keith Kuester null

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Mr. Andre Meier
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Mr. Gernot J. Mueller null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2013: Issue 227
Language:
English
Publication Date:
06 Nov 2013
DOI:
https://doi.org/10.5089/9781475513448.001
ISBN:
9781475513448
ISSN:
1018-5941
Pages:
49
Keywords:
WP; government debt; debt level; economic activity; Sovereign risk channel; monetary union; euro area; zero lower bound; risk premium; pooling of sovereign risk; stressed economy; risk pooling; transmission mechanism; Fiscal stance; Return on investment; Global; sovereign risk; copyright page; Belief-Driven fluctuation
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.” The model is calibrated to the euro area as of mid-2012. We show that 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. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent selffulfilling debt crises.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund