Debt stabilization in the presence of risk premia

A dynamic game approach

Tzanis Anevlavis, George Papavassilopoulos, Jacob Engwerda, B. van Aarle

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper focuses on the possibility that financial markets require risk premia on holding sovereign debt of countries that appear vulnerable from a fiscal sustainability perspective. Both the level of debt as well as the rate of change of debt are assumed to impact on the risk premium. We analyze the impact of such an endogenous risk premium in a simple debt game between a monetary and a fiscal player, as introduced by [Tabellini (1986) Journal of Economic Dynamics and Control 10, 427–442]. The risk premium term adds a nonlinearity to the linear model in case risk premia are absent. We analyze outcomes in case of noncooperative open-loop Nash strategies and in case of cooperative strategies and consider the workings of the risk premium as a market-based disciplining device (in case of high debt) and adjustment rewarding device (in case of a declining debt trajectory).
Original languageEnglish
Pages (from-to)2616-2648
JournalMacroeconomic Dynamics
Volume23
Issue number7
Early online dateJan 2018
DOIs
Publication statusPublished - Oct 2019

Fingerprint

Debt
Dynamic games
Stabilization
Risk premia
Risk premium
Fiscal
Market risk
Cooperative strategy
Fiscal sustainability
Financial markets
Endogenous risk
Economic dynamics
Trajectory
Nonlinearity
Sovereign debt

Keywords

  • debt stabilization
  • differential games
  • nonlinear dynamical systems
  • risk premium
  • economic dynamics

Cite this

Anevlavis, T., Papavassilopoulos, G., Engwerda, J., & van Aarle, B. (2019). Debt stabilization in the presence of risk premia: A dynamic game approach. Macroeconomic Dynamics, 23(7), 2616-2648. https://doi.org/10.1017/S1365100517000906
Anevlavis, Tzanis ; Papavassilopoulos, George ; Engwerda, Jacob ; van Aarle, B. / Debt stabilization in the presence of risk premia : A dynamic game approach. In: Macroeconomic Dynamics. 2019 ; Vol. 23, No. 7. pp. 2616-2648.
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Anevlavis, T, Papavassilopoulos, G, Engwerda, J & van Aarle, B 2019, 'Debt stabilization in the presence of risk premia: A dynamic game approach', Macroeconomic Dynamics, vol. 23, no. 7, pp. 2616-2648. https://doi.org/10.1017/S1365100517000906

Debt stabilization in the presence of risk premia : A dynamic game approach. / Anevlavis, Tzanis; Papavassilopoulos, George; Engwerda, Jacob; van Aarle, B.

In: Macroeconomic Dynamics, Vol. 23, No. 7, 10.2019, p. 2616-2648.

Research output: Contribution to journalArticleScientificpeer-review

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