IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v104y2014i5p88-93.html

Is It Too Late to Bail Out the Troubled Countries in the Eurozone?

Author

Listed:
  • Juan Carlos Conesa
  • Timothy J. Kehoe

Abstract

In January 1995, US President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the eurozone crises can end.

Suggested Citation

  • Juan Carlos Conesa & Timothy J. Kehoe, 2014. "Is It Too Late to Bail Out the Troubled Countries in the Eurozone?," American Economic Review, American Economic Association, vol. 104(5), pages 88-93, May.
    • Handle: RePEc:aea:aecrev:v:104:y:2014:i:5:p:88-93
    Note: DOI: 10.1257/aer.104.5.88
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.104.5.88
    Download Restriction: no
    File URL: http://www.aeaweb.org/aer/data/10405/P2014_1165_data.zip
    Download Restriction: no
    File URL: http://www.aeaweb.org/aer/ds/10405/P2014_1165_ds.zip
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 91-116.
    2. Juan Carlos Conesa & Timothy J. Kehoe, 2017. "Gambling for redemption and self-fulfilling debt crises," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 707-740, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jorge Alonso-Ortiz & Esteban Colla & José-María Da-Rocha, 2017. "The productivity cost of sovereign default: evidence from the European debt crisis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 611-633, December.
    2. Aloisio Araujo & Marcia Leon & Rafael Santos, 2017. "Bargained haircuts and debt policy implications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 635-656, December.
    3. Roch, Francisco & Uhlig, Harald, 2018. "The dynamics of sovereign debt crises and bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 1-13.
    4. Stavros A. Zenios & Andrea Consiglio & Marialena Athanasopoulou & Edmund Moshammer & Angel Gavilan & Aitor Erce, 2021. "Risk Management for Sustainable Sovereign Debt Financing," Operations Research, INFORMS, vol. 69(3), pages 755-773, May.
    5. repec:rim:rimwps:22-04 is not listed on IDEAS
    6. Levy, Daniel & Mayer, Tamir & Raviv, Alon, 2022. "Economists in the 2008 financial crisis: Slow to see, fast to act," Journal of Financial Stability, Elsevier, vol. 60(C).
    7. Giancarlo Corsetti & Fred Seunghyun Maeng, 2024. "Debt Crises, Fast and Slow," Journal of the European Economic Association, European Economic Association, vol. 22(5), pages 2148-2179.
    8. repec:rim:rimwps:20-05 is not listed on IDEAS
    9. Pásztor, Szabolcs, 2017. "Mozaikok Európa újraegyesüléséhez - az amerikai külpolitika és az európai multinacionális vállalatok szerepe. Berend T. Iván: The History of European Integration - A new perspective. Routledge, New Yo," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 208-212.
    10. Giancarlo Corsetti, 2023. "Debt crises, fast and slow Giancarlo," RSCAS Working Papers 2023/15, European University Institute.
    11. Gonzalo Fernandez-de-Cordoba & Pau Pujolas & Jose Torres, 2017. "Fiscal Discipline and Defaults," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 1-13, March.
    12. Corsetti, Giancarlo & Maeng, Fred Seunghyun, 2023. "The Theory of Reserve Accumulation, Revisited," CEPR Discussion Papers 18644, C.E.P.R. Discussion Papers.
    13. Corsetti, Giancarlo & Erce, Aitor & Uy, Timothy, 2018. "Debt Sustainability and the Terms of Official Support," CEPR Discussion Papers 13292, C.E.P.R. Discussion Papers.
    14. Conesa, Juan Carlos & Kehoe, Timothy J., 2024. "Preemptive austerity with rollover risk," Journal of International Economics, Elsevier, vol. 150(C).
    15. Siming Liu & Hewei Shen, 2022. "Fiscal Commitment and Sovereign Default Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 98-123, October.
    16. Piotr Ciżkowicz & Andrzej Rzońca & Andrzej Torój, 2019. "In Search of an Appropriate Lower Bound. The Zero Lower Bound vs. the Positive Lower Bound under Discretion and Commitment," German Economic Review, Verein für Socialpolitik, vol. 20(4), pages 1028-1053, November.
    17. Stangebye, Zachary R., 2020. "Beliefs and long-maturity sovereign debt," Journal of International Economics, Elsevier, vol. 127(C).
    18. Cassola, Nuno & Jorge, José, 2016. "The ECB's OMTs: A tale of governments, investors, and the central bank," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 94-116.
    19. Juan Carlos Conesa & Timothy J. Kehoe, 2017. "Gambling for redemption and self-fulfilling debt crises," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 707-740, December.
    20. Marialena Athanasopoulou & Andrea Consiglio & Aitor Erce & Angel Gavilan & Edmund Moshammer & Stavros A. Zenios, 2019. "Risk Management for Sovereign Debt Financing with Sustainability Conditions," Globalization Institute Working Papers 367, Federal Reserve Bank of Dallas.
    21. Gabriel Desgranges & Ms. Celine Rochon, 2014. "Optimal Maturity Structure of Sovereign Debt in Situation of Near Default," IMF Working Papers 2014/168, International Monetary Fund.
    22. Zachary Stangebye, 2023. "Long-Term Sovereign Debt: A Steady State Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 107-131, April.
    23. Vitor Gaspar, 2014. "The Making of a Continental Financial System: Lessons for Europe from Early American History," IMF Working Papers 2014/183, International Monetary Fund.
    24. V. V. Chari & Patrick J. Kehoe, 2016. "Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View," American Economic Review, American Economic Association, vol. 106(9), pages 2458-2493, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alessandro Dovis & Luigi Bocola, 2015. "Indeterminacy in Sovereign Debt Markets: An Empirical Investigation," 2015 Meeting Papers 694, Society for Economic Dynamics.
    2. Bai, Yan & Zhang, Jing, 2012. "Duration of sovereign debt renegotiation," Journal of International Economics, Elsevier, vol. 86(2), pages 252-268.
    3. Stefan Niemann & Paul Pichler, 2020. "Optimal fiscal policy and sovereign debt crises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 234-254, July.
    4. Cristina Arellano & Juan Carlos Conesa & Timothy J. Kehoe, 2012. "Chronic sovereign debt crises in the Eurozone, 2010-2012," Economic Policy Paper 12-4, Federal Reserve Bank of Minneapolis.
    5. Leonardo Martinez & Juan Hatchondo & Burhanettin Kuruscu & Bulent Guler, 2014. "Sovereign Bailouts," 2014 Meeting Papers 1278, Society for Economic Dynamics.
    6. Filippo Brutti & Philip Sauré, 2016. "Repatriation of Debt in the Euro Crisis," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 145-174.
    7. Joao Ayres & Gaston Navarro & Juan Pablo Nicolini & Pedro Teles, 2019. "Self-Fulfilling Debt Crises with Long Stagnations," Working Papers 757, Federal Reserve Bank of Minneapolis.
    8. Mark Aguiar & Manuel Amador, 2013. "Sovereign Debt: A Review," NBER Working Papers 19388, National Bureau of Economic Research, Inc.
    9. Roch, Francisco & Uhlig, Harald, 2018. "The dynamics of sovereign debt crises and bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 1-13.
    10. Stavros A. Zenios & Andrea Consiglio & Marialena Athanasopoulou & Edmund Moshammer & Angel Gavilan & Aitor Erce, 2021. "Risk Management for Sustainable Sovereign Debt Financing," Operations Research, INFORMS, vol. 69(3), pages 755-773, May.
    11. Alonso-Ortiz, Jorge & Colla, Esteban & Da-Rocha, Jose-Maria, 2014. "Bounding the productivity default shock : Evidence from the The European Sovereign Debt Crisis," MPRA Paper 59617, University Library of Munich, Germany.
    12. Corsetti, Giancarlo & Maeng, Fred Seunghyun, 2023. "The Theory of Reserve Accumulation, Revisited," CEPR Discussion Papers 18644, C.E.P.R. Discussion Papers.
    13. Luigi Bocola & Alessandro Dovis, 2019. "Self-Fulfilling Debt Crises: A Quantitative Analysis," American Economic Review, American Economic Association, vol. 109(12), pages 4343-4377, December.
    14. Broner, Fernando & Erce, Aitor & Martin, Alberto & Ventura, Jaume, 2014. "Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 114-142.
    15. Cui, Wei & Kaas, Leo, 2021. "Default cycles," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 377-394.
    16. Juan Hernandez, 2018. "How International Reserves Reduce the Probability of Debt Crises," 2018 Meeting Papers 1203, Society for Economic Dynamics.
    17. Bacchetta, Philippe & Perazzi, Elena & van Wincoop, Eric, 2018. "Self-fulfilling debt crises: What can monetary policy do?," Journal of International Economics, Elsevier, vol. 110(C), pages 119-134.
    18. Galli, Carlo, 2021. "Self-fulfilling debt crises, fiscal policy and investment," Journal of International Economics, Elsevier, vol. 131(C).
    19. Conesa, Juan Carlos & Kehoe, Timothy J., 2024. "Preemptive austerity with rollover risk," Journal of International Economics, Elsevier, vol. 150(C).
    20. Vitor Gaspar, 2014. "The Making of a Continental Financial System: Lessons for Europe from Early American History," IMF Working Papers 2014/183, International Monetary Fund.

    More about this item

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:104:y:2014:i:5:p:88-93. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.