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An analysis of eurobonds

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  • Beetsma, Roel
  • Mavromatis, Kostas

Abstract

We analyse different forms of debt mutualisation in a union of countries. One country suffers from a political distortion and may resort to (partial) debt default. We consider a debt repayment guarantee, which can be “unlimited” or ”limited”, i.e. only be invoked when the guarantee threshold is not exceeded. We also explore the ”blue–red” bonds proposal, under which blue debt is guaranteed, while red debt is not guaranteed. Only a suitably chosen limited guarantee induces the government to reduce debt and raises union welfare. This result is upheld under the time-consistent solution when there are costs to the rest of the union of not providing financial rescue. Making the guarantee also conditional on sufficient structural reform may in addition stimulate reform effort, thereby raising union welfare.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 45 (2014)
Issue (Month): C ()
Pages: 91-111

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Handle: RePEc:eee:jimfin:v:45:y:2014:i:c:p:91-111

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Eurobonds; Debt guarantee; Blue and red bonds; Structural reform; Default; Union;

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References

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  1. Stijn Claessens & Shahin Vallée, 2012. "Paths to eurobonds," Working Papers 733, Bruegel.
  2. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
  3. Beetsma, Roel & Jensen, Henrik, 2003. "Contingent deficit sanctions and moral hazard with a stability pact," Journal of International Economics, Elsevier, vol. 61(1), pages 187-208, October.
  4. Claessens, Stijn & Diwan, Ishac, 1990. "Investment Incentives: New Money, Debt Relief, and the Critical Role of Conditionality in the Debt Crisis," World Bank Economic Review, World Bank Group, vol. 4(1), pages 21-41, January.
  5. Harald Uhlig, 2013. "Sovereign Default Risk and Banks in a Monetary Union," CESifo Working Paper Series 4368, CESifo Group Munich.
  6. Corsetti, Giancarlo & Kuester, Keith & Meier, André & Müller, Gernot, 2012. "Sovereign Risk, Fiscal Policy, and Macroeconomic Stability," CEPR Discussion Papers 8779, C.E.P.R. Discussion Papers.
  7. Jakob von Weizsäcker & Jacques Delpla, 2010. "The Blue Bond Proposal," Policy Briefs 403, Bruegel.
  8. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  9. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-55, June.
  10. Pier Carlo Padoan & Urban Sila & Paul van den Noord, 2012. "Avoiding debt traps: Fiscal consolidation, financial backstops and structural reforms," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 151-177.
  11. International Monetary Fund, 2011. "Did the Euro Crisis Affect Non-Financial Firm Stock Prices Through a Financial or Trade Channel?," IMF Working Papers 11/227, International Monetary Fund.
  12. Carlo Favero & Alessandro Missale, 2012. "Sovereign spreads in the eurozone: which prospects for a Eurobond?," Economic Policy, CEPR & CES & MSH, vol. 27(70), pages 231-273, 04.
  13. Beetsma, Roel & Uhlig, Harald, 1999. "An Analysis of the Stability and Growth Pact," Economic Journal, Royal Economic Society, vol. 109(458), pages 546-71, October.
  14. Juan Carlos Hatchondo & Francisco Roch & Leonardo Martinez, 2012. "Fiscal Rules and the Sovereign Default Premium," IMF Working Papers 12/30, International Monetary Fund.
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Cited by:
  1. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers 379, Netherlands Central Bank, Research Department.

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