Discussion Paper Details

Please find the details for DP9723 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Sovereign risk and belief-driven fluctuations in the euro area

Author(s): Giancarlo Corsetti, Keith Kuester, André Meier and Gernot Müller

Publication Date: November 2013

Keyword(s): euro area, monetary union, pooling of sovereign risk, risk premium, sovereign risk channel and zero lower bound

Programme Area(s): International Macroeconomics

Abstract: 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 self-fulfilling debt crises.

For full details and related downloads, please visit:

Bibliographic Reference

Corsetti, G, Kuester, K, Meier, A and Müller, G. 2013. 'Sovereign risk and belief-driven fluctuations in the euro area'. London, Centre for Economic Policy Research.