Debt Stabilization in the Presence of Endogenous Risk Premia: A Dynamic Game Approach

Anevlavis, Tzanis; Papavassilopoulos, George P.; Engwerda, Jacob; Aarle, Bas van

doi:10.1017/s1365100517000906

Cited by 10 publications

(7 citation statements)

References 24 publications

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“…Christos Mavrodimitrakis https://orcid.org/0000-0002-7436-9164 ENDNOTES 1 In a recent paper, Libich (2020) argues that the separation set-up of monetary and macro-prudential policies to different authorities is not desirable due to an inherent strategic conflict between those policies. 2 Further references include Anevlavis et al (2019), Engwerda, , Engwerda, van Aarle, Plasmans, and Weeren (2013), Tabellini (1986), andVieira, Machado, andRibeiro (2018). 3 Also quoted in Hughes Hallett et al (2011), Blanchard (2009 calls for the"…relegalization of shortcuts and of simple models".…”

Section: Orcidmentioning

confidence: 99%

“…Then, a risk premium on country-specific nominal interest rates according to the country-specific fiscal stances is assumed, in order to investigate the outcome for the policy mix and for debt stabilization. The risk premium acts as a form of 'marketbased' discipline, since prudent policy-makers would seek to avoid high indebtedness (Anevlavis et al, 2019).…”

Section: Introductionmentioning

confidence: 99%

“…In the aftermath of the Great Recession, many member‐states of the EMU find themselves with increased deficits and debts that contributed to a lack of access to financial markets in order to cover their needs (Blueschke & Neck, 2011). For some countries, this was also due to substantial efforts to recapitalise the banking sector (Anevlavis, Papavassilopoulos, Engwerda, & van Aarle, 2019). The mainstream view was that the sovereign debt crisis is due to fiscal indiscipline that each country must restore by itself (Wyplosz, 2014).…”

Section: Introductionmentioning

confidence: 99%

“…Then, a risk premium on country‐specific nominal interest rates according to the country‐specific fiscal stances is assumed, in order to investigate the outcome for the policy mix and for debt stabilization. The risk premium acts as a form of ‘market‐based’ discipline, since prudent policy‐makers would seek to avoid high indebtedness (Anevlavis et al, 2019). Thus, the idea is to compare the two preventive procedures: (a) the authority‐based one, which works through a debt‐concerned monetary authority, and (b) the market‐based one through financial markets.…”

Section: Introductionmentioning

confidence: 99%

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Debt stabilization and financial stability in a monetary union: Market versus authority‐based preventive solutions

Mavrodimitrakis

2020

Int. J Fin Econ

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Is a debt-concerned monetary authority desirable? This article deals with the impact of fiscal-monetary policy interactions in a monetary union on countryspecific and union-wide debt stabilization, when the authorities act strategically. The focus is on the impact that monetary policy would have on a debt-concerned fiscal authority through the debt constraint and the corresponding interaction with decentralized fiscal policies. It is shown that the fiscal-monetary (overall) policy coordination strategic regime delivers better results than the non-cooperative regime for both the output gap and the outstanding level of debt at the union level. Two further institutional arrangements are investigated and compared: An authority-based preventive procedure, which works through a debt-concerned monetary authority, and a market-based one, which works through financial markets by assuming a risk premium on country-specific nominal interest rates according to the countryspecific fiscal stances. The risk premium acts as a form of 'market-based' discipline. Both regimes stand between the decentralized and the centralized setting. The central bank's optimal weight on union-wide debt stabilization is computed when financial markets provide discipline to the fiscal authorities. It is optimal for the social planner to appoint a debt-concerned central banker, if there is a degree of conservatism from the monetary authority, and/or if the social planner cares about union-wide debt stabilization. A higher risk premium parameter enhances the impact of the former on the optimal weight on union-wide debt stabilization, while it reduces the impact of the latter.

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Section: Orcidmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Debt stabilization and financial stability in a monetary union: Market versus authority‐based preventive solutions

Mavrodimitrakis

2020

Int. J Fin Econ

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“…Anevlavis et al . (2019) consider a game between two players responsible for monetary and fiscal policy within a country.…”

Section: Introductionmentioning

confidence: 99%

Assessing the 2010–2018 financial crisis in Greece, Portugal, Ireland, Spain, and Cyprus

Hausken

Welburn

2020

JES

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PurposeThe article develops a model to interpret the 2010–2018 financial crisis in Greece, Portugal, Ireland, Spain and Cyprus, and the loan programs from the IL (International Lender; i.e. the European Union, the European Commission, and the International Monetary Fund).Design/methodology/approachFor each country, an isoelastic utility with constant relative risk aversion is assumed. For the IL a Cobb Douglas utility is assumed with consumption, the GDP (Gross Domestic Product) to debt ratio, and market stability as inputs, accounting for time discounting. This article applies two methods to assess the empirics. The first method considers the IL's strategy as a whole over the 2010–2018 period. The second method assumes that the IL maximizes its utility in one period to determine its optimal loan, accounting for the empirics in that period, and the debt in the previous period.FindingsFor the first method, when the output elasticity in the IL's Cobb Douglas utility is high favoring consumption, the IL prefers offering a higher loan than its actual loan. Otherwise the IL prefers to offer no loan. The output elasticity at which the IL prefers to offer a loan is lowest for Greece, second lowest for Cyprus, third lowest for Portugal, and highest for Ireland and Spain. A high loan to Greece over a larger range of the output elasticity for Greece's consumption is supported by Greece being prioritized through the loan program. For the second method, the IL prefers to offer no loan to Greece which is too burdened with debt. Thus, the first method seems preferable, considering the entire duration of the crisis holistically.Originality/valueThe article offers a novel perspective of how to assess debt crises, enabling the IL to weigh various factors such as consumption, GDP, loan offered, and each country's debt to credit markets.

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A Nash Equilibrium for Differential Games with Moving-Horizon Strategies

2021

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Debt Stabilization in the Presence of Endogenous Risk Premia: A Dynamic Game Approach

Cited by 10 publications

References 24 publications

Debt stabilization and financial stability in a monetary union: Market versus authority‐based preventive solutions

Debt stabilization and financial stability in a monetary union: Market versus authority‐based preventive solutions

Assessing the 2010–2018 financial crisis in Greece, Portugal, Ireland, Spain, and Cyprus

A Nash Equilibrium for Differential Games with Moving-Horizon Strategies

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