Self-Fulfilling Crises in the Eurozone: An Empirical Test
By P. Grauwe, Yuemei Ji. Social Science Research Network, 2012
657 citations recorded by the source corpus.
This paper tests the hypothesis that government bond markets in the eurozone are more fragile and more susceptible to self-fulfilling liquidity crises than in stand-alone countries. We find evidence that a significant part of the surge in the spreads of the PIGS countries (Portugal, Ireland, Greece and Spain) in the eurozone during 2010-11 was disconnected from underlying increases in the debt-to-GDP ratios and fiscal space variables, and was the result of negative self-fulfilling market sentiments that became very strong since the end of 2010. We argue that this can drive member countries of the eurozone into bad equilibria. We also find evidence that after years of neglecting high government debt, investors became increasingly worried about this in the eurozone, and reacted by raising the spreads. No such worries developed in stand-alone countries despite the fact that debt-to-GDP ratios and fiscal space variables were equally high and increasing in these countries.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/074117f592b285e06823f496e95dc2b6487c53e9
How researchers see this paper
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In Economics and Econometrics
- P. Hall
- Xavier Vives
- Gregory Jackson
- A. Nölke
- Elena Carletti
- Michael A. Witt
- Rafael Repullo
- Frank Schimmelfennig
In Finance
Citations in the corpus
- Varieties of capitalism in light of the euro crisis (2018, background): “…a large expansion of debt, much of it in the private sector, especially in the context of asset booms in Spain and Ireland, and growing current account imbalances in the eurozone, to which the spreads on sovereign debt became increasingly sensitive (De Grauwe and Ji 2013; Iversen and Soskice 2013).”
- Strategic Complementarity, Fragility, and Regulation (2014, methodology): “Matutes and Vives (1996) present a model that combines the banking model of Diamond (1984) with a differentiated duopolistic structure à la Hotelling.”