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Sovereign debt crisis, fiscal consolidation, and active central bankers in a monetary union

Author

Listed:
  • Canofari Paolo
  • Di Bartolomeo Giovanni
  • Messori Marcello

Abstract

This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good that sovereign debt shocks can undermine in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery.

Suggested Citation

  • Canofari Paolo & Di Bartolomeo Giovanni & Messori Marcello, 2022. "Sovereign debt crisis, fiscal consolidation, and active central bankers in a monetary union," wp.comunite 00152, Department of Communication, University of Teramo.
    • Handle: RePEc:ter:wpaper:00152
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    Cited by:

    1. D'Andrea, Sara & Vassalli, Federica, 2022. "The Uncertainty of Fairness: a Game Theory Analysis for a Debt Mutualization Scheme in the Euro Area," MPRA Paper 114690, University Library of Munich, Germany.
    2. Pierpaolo Benigno & Paolo Canofari & Giovanni Bartolomeo & Marcello Messori, 2024. "The Spectre of Financial Dominance in the Eurozone," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 10(1), pages 59-80, March.
    3. Pierpaolo Benigno & Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori, 2023. "The ECB's asset purchase programme: Theory, effects, and risks," Journal of Economic Surveys, Wiley Blackwell, vol. 37(3), pages 890-914, July.
    4. Christos Mavrodimitrakis, 2022. "The Policy Mix in a Monetary Union: Who Bears the Burden of Asymmetric Shocks' Stabilisation?," Economics Discussion Papers em-dp2022-12, Department of Economics, University of Reading.

    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • 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
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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