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"Haircuts" for the EMU Periphery: Virtue or Vice?

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  • Neck, Reinhard
  • Blüschke, Dmitri

Abstract

We use a dynamic game model of a two-country monetary union to study the impacts of an exogenous fall in aggregate demand, the resulting increase in public debt, and the consequences of a sovereign debt haircut for a member country or bloc of the union. In this union, the governments of participating countries pursue national goals when deciding on fiscal policies, while the common central bank s monetary policy aims at union-wide objective variables. The union considered is asymmetric, consisting of a core with lower initial public debt, and a periphery with higher initial public debt. The periphery may experience a debt relief ( haircut ) due to an evolving high sovereign debt. Calibrating the model to the Euro Area, we calculate numerical solutions of the dynamic game between the governments and the central bank using the OPTGAME algorithm. We show that a haircut as modeled in our study is disadvantageous for both the core and the periphery of the monetary union. Moreover, the cooperative solution is preferable to the noncooperative equilibrium solution (both without and with a haircut ), providing an argument for coordinated fiscal policies in a monetary union. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79887.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79887

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Web page: http://www.socialpolitik.org/
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  1. Reinhard Neck & Doris Behrens, 2009. "A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations," Atlantic Economic Journal, International Atlantic Economic Society, vol. 37(4), pages 335-349, December.
  2. Bas van Aarle & Giovanni Di Bartolomeo & Jacob Engwerda & Joseph Plasmans, 2002. "Monetary and Fiscal Policy Design in the EMU: An Overview," Open Economies Review, Springer, vol. 13(4), pages 321-340, October.
  3. Dmitri Blueschke & Reinhard Neck, 2011. "“Core” and “Periphery” in a Monetary Union: A Macroeconomic Policy Game," International Advances in Economic Research, Springer, vol. 17(3), pages 334-346, August.
  4. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
  5. Gottfried Haber & Reinhard Neck & Warwick McKibbin, 2002. "Global Implications of Monetary and Fiscal Policy Rules in the EMU," Open Economies Review, Springer, vol. 13(4), pages 363-379, October.
  6. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
  7. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, October.
  8. Marcus Miller & Mark Salmon, 1985. "Policy Coordination And Dynamic Games," NBER Chapters, in: International Economic Policy Coordination, pages 184-227 National Bureau of Economic Research, Inc.
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