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Fiscal Discipline and Defaults

Author

Listed:
  • Gonzalo Fernandez-de-Cordoba

    (Universidad de Cordoba)

  • Pau Pujolas

    (McMaster University)

  • Jose Torres

    (Universidad de Malaga)

Abstract

We develop a general equilibrium model with a detailed structure of government expenditures and revenues, calibrate it to the Greek and German economies, and use it study the link between fiscal discipline and defaults. We show that even if the Greek government had entered the Great Recession with the same structure of government expenditures and revenues as Germany, but with the Greek level of debt, it would still have chosen to default when facing a high interest rate. Alternatively, if the Greek government had kept its structure of government expenditures and revenues, but managed to decrease its debt to the level of Germany, it would not have defaulted. The primacy of debt over the structure of government expenditures and revenues in default decisions is further emphasized by our findings that even if Germany, with a low level of debt, faced the same high interest rate as Greece did, it would still not have defaulted. (Copyright: Elsevier)

Suggested Citation

  • 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.
  • Handle: RePEc:red:issued:13-49
    DOI: 10.1016/j.red.2016.12.001
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    File URL: http://dx.doi.org/10.1016/j.red.2016.12.001
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    References listed on IDEAS

    as
    1. Gonzalo Fernández-de-Córdoba & Javier Pérez & José Torres, 2012. "Public and private sector wages interactions in a general equilibrium model," Public Choice, Springer, vol. 150(1), pages 309-326, January.
    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.
    3. Satyajit Chatterjee & Burcu Eyigungor, 2012. "Maturity, Indebtedness, and Default Risk," American Economic Review, American Economic Association, vol. 102(6), pages 2674-2699, October.
    4. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    5. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 91-116.
    6. 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.
    7. 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.
    8. Chamley Christophe P & Pinto Brian, 2011. "Why Official Bailouts Tend Not To Work: An Example Motivated by Greece 2010," The Economists' Voice, De Gruyter, vol. 8(1), pages 1-5, February.
    9. 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.
    10. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
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    Cited by:

    1. Diego Anzoategui, 2019. "Sovereign Debt and the Effects of Fiscal Austerity," 2019 Meeting Papers 441, Society for Economic Dynamics.

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    More about this item

    Keywords

    Dynamic General Equilibrium Model; Fiscal Policy; Government Expenditure; Government Default;
    All these keywords.

    JEL classification:

    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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