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Fiscal Consolidation and Sovereign Risk in the Euro-zone Periphery

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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 fiÂ…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 Â…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, University of Rome La Sapienza, Department of Economics and Law.
    • Handle: RePEc:sap:wpaper:wp167
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    More about this item

    Keywords

    default risk; interest rates; Â…fiscal policy; monetary policy; liquidity trap; Bayesianestimation;
    All these keywords.

    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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