Exit Expectations and Debt Crises in Currency Unions

Aufsätze referiert extern - Web of Science 2019

Alexander Kriwoluzky, Gernot J. Müller, Martin Wolf

In: Journal of International Economics 121 (2019), im Ersch. [online first 2019-09-06, Art. 103253]

Abstract

We study a sovereign debt crisis in a small member state of a currency union. If the country exits the currency union, it may redenominate its liabilities and reduce the real value of debt through depreciation and inflation. We analyze formally how the anticipation of this possibility, “exit expectations”, impact the dynamics of the sovereign debt crisis. First, we show that public debt accumulates faster and sovereign yields increase more strongly because of redenomination risk. Second, we find that exit expectations induce public debt to be stagflationary. Last, we analyze Greek time-series data through the lens of our model and quantify the contribution of exit expectations to the Greek crisis.

Alexander Kriwoluzky

Abteilungsleiter in der Abteilung Makroökonomie



JEL-Classification: E52;E62;F41
Keywords: Currency union, Exit, Sovereign debt crisis, Fiscal policy, Redenomination risk, Euro crisis, Regime-switching model
DOI:
https://doi.org/10.1016/j.jinteco.2019.103253