The Perils of Debt Deflation in the Euro Area – A Multi Regime Model

26 Pages Posted: 30 Sep 2015

See all articles by Willi Semmler

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Alexander Haider

The New School - Department of Economics

Date Written: August 2015

Abstract

Academic research and policy makers in the Euro area are currently concerned with the threat of debt deflation and secular stagnation in Europe. Empirical evidence seems to suggest that secular stagnation and debt deflation in the Euro area may be rather slowly developing. Yet what appears as major peril is that debt deflation with a lack of economic growth, rising real interest rates and further rising debt may trigger household defaults, defaults of firms and banks, rise of risk premia, and default risk of certain sectors of the economy or sovereign defaults. It is this rising default and financial risk then that may lead to a regime change to a slowly moving debt crisis with high financial risk and high financial stress. In order to explore those issues, a macro policy model of Svensson type is introduced, exhibiting a regime of low and high financial stress. Then, a four dimensional multi-regime VAR is employed to an Euro area data set to support the theoretical model and the claim that in particular Southern Euro area countries are affected by debt deflation and financial market stress.

Keywords: Debt Deflation, Secular Stagnation, Euro Area, Interest Rate Spread, Multi Regime Model

JEL Classification: E430, F36, F450

Suggested Citation

Semmler, Willi and Haider, Alexander, The Perils of Debt Deflation in the Euro Area – A Multi Regime Model (August 2015). ZEW - Centre for European Economic Research Discussion Paper No. 15-071. Available at SSRN: https://ssrn.com/abstract=2667000 or http://dx.doi.org/10.2139/ssrn.2667000

Willi Semmler (Contact Author)

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universitätsstraße 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Alexander Haider

The New School - Department of Economics ( email )

Room 1116
6 East 16th Street
New York, NY 10003
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
48
Abstract Views
624
PlumX Metrics