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January 20, 2016

Seminar

Does Austerity Pay Off?

Date

January 20, 2016
12:00 - 13:15

Location

Gustav-Schmoller-Raum
DIW Berlin im Quartier 110
Room 3.3.002A
Mohrenstraße 58
10117 Berlin

Speakers

Johannes Pfeifer, University of Mannheim

We investigate whether a reduction of government consumption lowers the sovereign default premium. For this purpose we build a new data set for 38 emerging and developed economies. Results vary along three dimensions. First, the time horizon: the premium declines, but only in the long run. Second, initial conditions: the premium increases in the short run, but only if it is already high. Third, size: the short-run response of the premium increases disproportionately in the reduction of government consumption. We rationalize these findings in a model of optimal sovereign default where default risk is priced in an actuarially fair manner.

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