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Is It Too Late to Bail Out the Troubled Countries in the Eurozone?

Author

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  • Juan Carlos Conesa
  • Timothy J. Kehoe

Abstract

In January 1995, U.S. President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the Eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the Eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the Eurozone crises can end.

Suggested Citation

  • Juan Carlos Conesa & Timothy J. Kehoe, 2014. "Is It Too Late to Bail Out the Troubled Countries in the Eurozone?," Staff Report 497, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:497
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    References listed on IDEAS

    as
    1. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 91-116.
    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.
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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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