Interdependence of Fiscal Debts in EMU

23 Pages Posted: 1 Nov 2011

See all articles by Maria Demertzis

Maria Demertzis

Bruegel

Nicola Viegi

University of Pretoria - Department of Economics

Date Written: August 1, 2011

Abstract

We use an overlapping generations model to show that a bail-out is the optimal response to a fiscal crisis when the level of integration in a Monetary Union is high and the departure from Ricardian equivalence is significant. As it may not be optimal expost, the no bail-out rule is not credible ex-ante. To make it credible, one would have to look for arrangements that make the cost of one country defaulting sufficiently small, such that it does not impose a risk to the viability of the whole Monetary Union. One way to do that that we exploit is by reducing the relative size of the individual fiscal authority (from national to regional, for example).

Keywords: Debt Default, Monetary Union, Bail-Out

JEL Classification: E62, F33

Suggested Citation

Demertzis, Maria and Viegi, Nicola, Interdependence of Fiscal Debts in EMU (August 1, 2011). De Nederlandsche Bank Working Paper No. 309. Available at SSRN: https://ssrn.com/abstract=1951902 or http://dx.doi.org/10.2139/ssrn.1951902

Maria Demertzis (Contact Author)

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Nicola Viegi

University of Pretoria - Department of Economics ( email )

Pretoria 0002
South Africa

HOME PAGE: http://www.nviegi.net

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