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An Analysis of Eurobonds

We analyse different forms of international debt mutualisation in a simple framework with a political distortion and (partial) default under adverse economic circumstances. One form is a debt repayment guarantee, which can be "unlimited" or "limited", i.e. only be invoked when the guarantee threshold is not exceeded. We also explore the "blue-red" bonds proposal, under which blue debt is guaranteed by the other countries in a union, while red debt is not guaranteed. Only a suitably chosen limited guarantee induces the government to reduce debt and raises social welfare. Making the guarantee also conditional on sufficient structural reform may stimulate reform effort. However, now a trade-off exists between extracting more reform and inducing the government to limit debt issuance.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9244.

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Date of creation: Dec 2012
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Handle: RePEc:cpr:ceprdp:9244
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  1. Harald Uhlig, 2013. "Sovereign Default Risk and Banks in a Monetary Union," NBER Working Papers 19343, National Bureau of Economic Research, Inc.
  2. Giancarlo Corsetti & Keith Kuester & André Meier & Gernot J. Müller, 2013. "Sovereign Risk, Fiscal Policy, and Macroeconomic Stability," Economic Journal, Royal Economic Society, vol. 0, pages F99-F132, 02.
  3. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
  4. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 403-14, July.
  5. Claessens, Stijn & Diwan, Ishac, 1990. "Investment Incentives: New Money, Debt Relief, and the Critical Role of Conditionality in the Debt Crisis," World Bank Economic Review, World Bank Group, vol. 4(1), pages 21-41, January.
  6. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
  7. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
  8. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-55, June.
  9. Pier Carlo Padoan & Urban Sila & Paul van den Noord, 2012. "Avoiding debt traps: Fiscal consolidation, financial backstops and structural reforms," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 151-177.
  10. Carlo Favero & Alessandro Missale, 2012. "Sovereign spreads in the eurozone: which prospects for a Eurobond?," Economic Policy, CEPR;CES;MSH, vol. 27(70), pages 231-273, 04.
  11. Beetsma, Roel & Jensen, Henrik, 2003. "Contingent deficit sanctions and moral hazard with a stability pact," Journal of International Economics, Elsevier, vol. 61(1), pages 187-208, October.
  12. Beetsma, Roel & Uhlig, Harald, 1999. "An Analysis of the Stability and Growth Pact," Economic Journal, Royal Economic Society, vol. 109(458), pages 546-71, October.
  13. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers 379, Netherlands Central Bank, Research Department.
  14. International Monetary Fund, 2011. "Did the Euro Crisis Affect Non-Financial Firm Stock Prices Through a Financial or Trade Channel?," IMF Working Papers 11/227, International Monetary Fund.
  15. Ashoka Mody & Stijn Claessens & Shahin Vallée, 2012. "Paths to Eurobonds," IMF Working Papers 12/172, International Monetary Fund.
  16. Jakob von Weizsäcker & Jacques Delpla, 2010. "The Blue Bond Proposal," Policy Briefs 403, Bruegel.
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