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Fiscal Discipline and Defaults

Listed author(s):
  • Gonzalo Fernandez-de-Cordoba

    (Universidad de Cordoba)

  • Pau Pujolas

    (McMaster University)

  • Jose Torres

    (Universidad de Malaga)

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)

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File URL: http://dx.doi.org/10.1016/j.red.2016.12.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 24 (2017)
Issue (Month): (March)
Pages: 1-13

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Handle: RePEc:red:issued:13-49
DOI: 10.1016/j.red.2016.12.001
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  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, 2012. "Gambling for redemption and self-fulfilling debt crises," Staff Report 465, Federal Reserve Bank of Minneapolis.
  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. 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.
  7. 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.
  8. 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.
  9. Alessandro Dovis & Luigi Bocola, 2016. "Self_fulfilling Debt Crises: A Quantitative Analysis," 2016 Meeting Papers 1218, Society for Economic Dynamics.
  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.
  11. Luigi Bocola & Alessandro Dovis, 2016. "Self-Fulfilling Debt Crises: A Quantitative Analysis," NBER Working Papers 22694, National Bureau of Economic Research, Inc.
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