skip to content

Faculty of Economics

Journal Cover

Corsetti, G., Kuester, K., Meier, A. and Müller, G. J.

Sovereign risk and belief-driven fluctuations in the euro area

Journal of Monetary Economics

Vol. 61(1) pp. 53-73 (2014)

Abstract: Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.” The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent self-fulfilling debt crises.

Keywords: Sovereign risk channel, monetary union, euro area, zero lower bound, risk premium, pooling of sovereign risk

JEL Codes: E62, F41, F42

Author links: Giancarlo Corsetti  

Publisher's Link:

Papers and Publications

Recent Publications

Jochmans, K., and Weidner, M. Fixed-Effect Regressions on Network Data Econometrica [2019]

Fruehwirth, J., Iyer, S. and Zhang, A. Religion and Depression in Adolescence Journal of Political Economy [2019]

Liu, K. Wage Risk and the Value of Job Mobility in Early Employment Careers Journal of Labor Economics [2019]

Chen, J., Li, D., & Linton, O. A new semiparameteric estimation approach for large dynamic covariance matrices with multiple conditioning variables Journal of Econometrics [2019]