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Interdependence of Fiscal Debts in EMU

Author

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  • Maria Demertzis
  • Nicola Viegi

Abstract

We use an overlapping generations model to show that a bail-out is the optimal response to a fiscal crisis when the level of integration in a Monetary Union is high and the departure from Ricardian equivalence is significant. As it may not be optimal expost, the no bail-out rule is not credible ex-ante. To make it credible, one would have to look for arrangements that make the cost of one country defaulting sufficiently small, such that it does not impose a risk to the viability of the whole Monetary Union. One way to do that that we exploit is by reducing the relative size of the individual fiscal authority (from national to regional, for example).

Suggested Citation

  • Maria Demertzis & Nicola Viegi, 2011. "Interdependence of Fiscal Debts in EMU," DNB Working Papers 309, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:309
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    File URL: https://www.dnb.nl/en/binaries/working%20paper%20309_tcm47-257055.pdf
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    Cited by:

    1. Fahrholz Christian & Freytag Andreas, 2014. "Finanzpolitik in Europa zwischen Subsidiarität und Vergemeinschaftung: Eine ordnungsökonomische Analyse / Between subsidiarity and Europeanization: An ordo-liberal perspective on financial policy," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 65(1), pages 99-116, January.

    More about this item

    Keywords

    Debt Default; Monetary Union; Bail-Out;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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