Sovereign Debt, Bail-Outs and Contagion in a Monetary Union

S.C.W. Eijffinger, M.L. Kobielarz, R.B. Uras

Research output: Working paperDiscussion paperOther research output

159 Downloads (Pure)

Abstract

Abstract: The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble. We incorporate this theoretical foundation in an otherwise standard small open economy DSGE model and explain (i) the convergence of interest rates on sovereign bonds following the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden surge in interest rates in countries with relatively sound economic and financial fundamentals. We calibrate the model to match the behavior of the Portuguese
economy over the period of 1998 to 2012.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages23
Volume2015-004
Publication statusPublished - 5 Mar 2015

Publication series

NameEBC Discussion Paper
Volume2015-004

Fingerprint

Bailouts
Contagion
Interest rates
Sovereign bonds
Sovereign debt
Monetary union
Bond spreads
Bailout
European monetary integration
Default risk
Borrowing
Sovereign debt crises
Economics
DSGE models
Greece
Small open economy
Guarantee
Costs

Keywords

  • EMU
  • sovereign debt crisis
  • contagion
  • bail-out
  • interest rate spread

Cite this

Eijffinger, S. C. W., Kobielarz, M. L., & Uras, R. B. (2015). Sovereign Debt, Bail-Outs and Contagion in a Monetary Union. (EBC Discussion Paper; Vol. 2015-004). Tilburg: Economics.
Eijffinger, S.C.W. ; Kobielarz, M.L. ; Uras, R.B. / Sovereign Debt, Bail-Outs and Contagion in a Monetary Union. Tilburg : Economics, 2015. (EBC Discussion Paper).
@techreport{61f72c67a909458196fcaffe08b107b2,
title = "Sovereign Debt, Bail-Outs and Contagion in a Monetary Union",
abstract = "Abstract: The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble. We incorporate this theoretical foundation in an otherwise standard small open economy DSGE model and explain (i) the convergence of interest rates on sovereign bonds following the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden surge in interest rates in countries with relatively sound economic and financial fundamentals. We calibrate the model to match the behavior of the Portugueseeconomy over the period of 1998 to 2012.",
keywords = "EMU, sovereign debt crisis, contagion, bail-out, interest rate spread",
author = "S.C.W. Eijffinger and M.L. Kobielarz and R.B. Uras",
year = "2015",
month = "3",
day = "5",
language = "English",
volume = "2015-004",
series = "EBC Discussion Paper",
publisher = "Economics",
type = "WorkingPaper",
institution = "Economics",

}

Eijffinger, SCW, Kobielarz, ML & Uras, RB 2015 'Sovereign Debt, Bail-Outs and Contagion in a Monetary Union' EBC Discussion Paper, vol. 2015-004, Economics, Tilburg.

Sovereign Debt, Bail-Outs and Contagion in a Monetary Union. / Eijffinger, S.C.W.; Kobielarz, M.L.; Uras, R.B.

Tilburg : Economics, 2015. (EBC Discussion Paper; Vol. 2015-004).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Sovereign Debt, Bail-Outs and Contagion in a Monetary Union

AU - Eijffinger, S.C.W.

AU - Kobielarz, M.L.

AU - Uras, R.B.

PY - 2015/3/5

Y1 - 2015/3/5

N2 - Abstract: The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble. We incorporate this theoretical foundation in an otherwise standard small open economy DSGE model and explain (i) the convergence of interest rates on sovereign bonds following the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden surge in interest rates in countries with relatively sound economic and financial fundamentals. We calibrate the model to match the behavior of the Portugueseeconomy over the period of 1998 to 2012.

AB - Abstract: The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble. We incorporate this theoretical foundation in an otherwise standard small open economy DSGE model and explain (i) the convergence of interest rates on sovereign bonds following the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden surge in interest rates in countries with relatively sound economic and financial fundamentals. We calibrate the model to match the behavior of the Portugueseeconomy over the period of 1998 to 2012.

KW - EMU

KW - sovereign debt crisis

KW - contagion

KW - bail-out

KW - interest rate spread

M3 - Discussion paper

VL - 2015-004

T3 - EBC Discussion Paper

BT - Sovereign Debt, Bail-Outs and Contagion in a Monetary Union

PB - Economics

CY - Tilburg

ER -

Eijffinger SCW, Kobielarz ML, Uras RB. Sovereign Debt, Bail-Outs and Contagion in a Monetary Union. Tilburg: Economics. 2015 Mar 5. (EBC Discussion Paper).