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Sovereign Bailouts: Are Ex-Ante Conditions Useful?

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  • Perazzi, Elena

Abstract

Bailout guarantees create moral hazard, even when full repayment can be enforced. In a strategic default model calibrated to the GIIPS countries, I show that, with unconditional bailout guarantees, government deficits are 6 to 15 percentage points higher than they would be in the absence of guarantees, for a given level of debt. Even if the frequency of outright defaults is reduced, this results in a high frequency of bailouts, which may be inefficient if providing a bailout is costly. In this case ex-ante fiscal conditions can be an effective way to make bailouts a time-consistent policy. The model provides a rationale to a recent reform of the European Stability Mechanism (ESM).

Suggested Citation

  • Perazzi, Elena, 2022. "Sovereign Bailouts: Are Ex-Ante Conditions Useful?," MPRA Paper 113462, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:113462
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    References listed on IDEAS

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    More about this item

    Keywords

    Bailouts; Moral Hazard; Ex-ante conditions;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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