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Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union

Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union AbstractThis 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The B.E. Journal of Macroeconomics de Gruyter

Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union

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Publisher
de Gruyter
Copyright
© 2022 Walter de Gruyter GmbH, Berlin/Boston
ISSN
1935-1690
eISSN
1935-1690
DOI
10.1515/bejm-2022-0038
Publisher site
See Article on Publisher Site

Abstract

AbstractThis 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.

Journal

The B.E. Journal of Macroeconomics – de Gruyter

Published: Jan 1, 2023

Keywords: core-periphery models; stability in a monetary union; risk sharing; monetary union institutions; unconventional policies

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