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Government Debt Deleveraging in the EMU

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  • Cole, Alexandre Lucas
  • Guerello, Chiara
  • Traficante, Guido

Abstract

We evaluate the stabilization properties of several rules and instruments to reduce government debt in a Currency Union, like the EMU. In a two-country New-Keynesian DSGE model, with a debt-elastic government bond spread and incomplete international financial markets, we study the effects of government debt deleveraging, under different scenarios for fiscal policy coordination. We find that greater stabilization is achieved when the two countries coordinate by stabilizing net exports. Moreover, we find that taxes are a better instrument for deleveraging compared to government transfers. Our policy prescriptions for the Euro Area are to reduce government debt less during recessions and liquidity traps, and to do so using distortionary taxes, while concentrating on reducing international demand imbalances.

Suggested Citation

  • Cole, Alexandre Lucas & Guerello, Chiara & Traficante, Guido, 2023. "Government Debt Deleveraging in the EMU," MPRA Paper 115980, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:115980
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    1. Cole, Alexandre Lucas & Guerello, Chiara & Traficante, Guido, 2020. "One Emu Fiscal Policy For The Euro," Macroeconomic Dynamics, Cambridge University Press, vol. 24(6), pages 1437-1477, September.

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    More about this item

    Keywords

    Sovereign Debt; International Policy Coordination; Monetary Union; New Keynesian;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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