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Fiscal Consolidation and Sovereign Risk in the Euro-zone Periphery

Author

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  • Elton Beqiraj
  • Massimiliano Tancioni

Abstract

Sovereign and private sector default probabilities are introduced in a monetary model to evaluate whether the consideration of a sovereign risk channel can affect the sizeand sign of fi scal multipliers, an hypothesis recently appeared in the literature. Themodel is estimated using data of EZ peripheral countries. From posterior estimatesand simulations we show that i) the relation between fundamentals, sovereign risk andinterest rate spreads is weak; ii) in the short term, the risk channel operates in a pro-cyclical direction, amplifying the effects of fiscal contractions; iii) the consideration ofa liquidity trap does not reverse this result.

Suggested Citation

  • Elton Beqiraj & Massimiliano Tancioni, 2014. "Fiscal Consolidation and Sovereign Risk in the Euro-zone Periphery," Working Papers in Public Economics 167, Department of Economics and Law, Sapienza University of Rome.
    • Handle: RePEc:sap:wpaper:wp167
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; 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
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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