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Borrowing from thy neighbour: a European perspective on sovereign debt

Author

Listed:
  • Miller, Marcus

    (University of Warwick)

  • Rankin, Neil

    (University of York)

  • Zhang, Lei

    (University of Warwick)

Abstract

European capital markets show increasing concern about the extent of sovereign debts and their sustainability. Here we explore some insights that the Overlapping Generations (OLG) framework has to offer on such issues. The OLG framework implies, for example, that there is a limit to the amount of debt that may be sustained in a closed economy- with high debt raising interest rates and crowding out capital formation. But capital market integration with less indebted partners allows for a fall in interest rates as a result of borrowing from one's neighbour. Indeed we find that - in equilibrium - most of the debt of a high indebted country will be transferred to partner countries.

Suggested Citation

  • Miller, Marcus & Rankin, Neil & Zhang, Lei, 2012. "Borrowing from thy neighbour: a European perspective on sovereign debt," CAGE Online Working Paper Series 73, Competitive Advantage in the Global Economy (CAGE).
    • Handle: RePEc:cge:wacage:73
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    File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/73.2012_miller.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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