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Borrowing from thy neighbour: a European perspective on sovereign debt

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Author Info

  • Miller, Marcus

    (University of Warwick)

  • Rankin, Neil

    (University of York)

  • Zhang, Lei

    (University of Warwick)

Abstract

European capital markets show increasing concern about the extent of sovereign debts and their sustainability. Here we explore some insights that the Overlapping Generations (OLG) framework has to offer on such issues. The OLG framework implies, for example, that there is a limit to the amount of debt that may be sustained in a closed economy- with high debt raising interest rates and crowding out capital formation. But capital market integration with less indebted partners allows for a fall in interest rates as a result of borrowing from one's neighbour. Indeed we find that - in equilibrium - most of the debt of a high indebted country will be transferred to partner countries.

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Bibliographic Info

Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 73.

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Date of creation: 2012
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Handle: RePEc:cge:warwcg:73

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Related research

Keywords: debt sustainability; overlapping generations; sovereign default; Euro-zone debt crisis;

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  1. Latika Chaudhary & Aldo Musacchio & Steven Nafziger & Se Yan, 2012. "Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China," NBER Working Papers 17852, National Bureau of Economic Research, Inc.
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