Effects of Eurobonds: A Stochastic Sovereign Debt Sustainability Analysis for Portugal, Ireland and Greece

23 Pages Posted: 16 May 2014 Last revised: 29 May 2017

See all articles by Joris Tielens

Joris Tielens

KU Leuven; National Bank of Belgium

Bas Van Aarle

Leuven Centre for Irish Studies LCIS; CESifo (Center for Economic Studies and Ifo Institute); Radboud University Nijmegen - Department of Economics

Jan Van Hove

KU Leuven - Center for Economic Studies

Date Written: May 1, 2014

Abstract

This paper assesses the impact of Eurobonds on sovereign debt dynamics for selected European member states (Greece, Ireland and Portugal). For each member state, we produce sovereign debt fan charts of (i) a baseline scenario (no Eurobonds) and (ii) Full-Fledged Eurobond introduction. The key building blocks of our methodology are (i) a debt framework (which embeds the traditional recursive debt equation), (ii) a vector autoregressive model to take into account and parametrise macroeconomic uncertainty and (iii) a fiscal reaction function. Conditional on the absence of moral hazard, we find Eurobonds to be a good instrument to absorb macroeconomic shocks and to diminish uncertainty over future debt forecasts; for Ireland and Portugal, we find debt to be 20 percentage points lower than under our baseline scenario, by 2020.

Keywords: Eurobonds, Stability Bonds, Sovereign debt sustainability, Sovereign debt crisis, Fan charts

JEL Classification: C32, H63, H68, H81

Suggested Citation

Tielens, Joris and van Aarle, Bas and Van Hove, Jan, Effects of Eurobonds: A Stochastic Sovereign Debt Sustainability Analysis for Portugal, Ireland and Greece (May 1, 2014). Journal of Macroeconomics, Vol. 42, 2014, Available at SSRN: https://ssrn.com/abstract=2437366 or http://dx.doi.org/10.2139/ssrn.2437366

Joris Tielens (Contact Author)

KU Leuven ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

National Bank of Belgium ( email )

Research Department
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Bas Van Aarle

Leuven Centre for Irish Studies LCIS ( email )

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Leuven, 3000
Belgium
+32 16 310433 (Phone)
+32 16 310431 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Radboud University Nijmegen - Department of Economics ( email )

P.O.Box 9108
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Netherlands
+31 24 3616172 (Phone)
+31 24 3611846 (Fax)

Jan Van Hove

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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