Sovereign Risk and Belief-Driven Fluctuations in the Euro Area

By Giancarlo Corsetti, Keith Kuester, André Meier, Gernot J. Müller. Social Science Research Network, 2013

118 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/708c9df8ff590b5f1871d4f71730cfb0be47a9d9

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In Economics and Econometrics

1. Thomas Philippon
2. Philippe Martin
3. Germán Gutiérrez
4. Robert E. Lucas
5. Jean Imbs

In Finance

1. Thomas Philippon
2. Philippe Martin

Citations in the corpus

• Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone (2017, background): “Contrary to Corsetti et al. (2013, 2014), we do not model precisely the feedback loop between the fiscal outlook (the probability of sovereign default) and public and private spreads but our modeling captures, in a reduced form, similar fundamental relations.”