“Haircuts” for the EMU periphery: virtue or vice?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Abstract:We use a dynamic game model of a two-country monetary union to study the impacts of an exogenous fall in aggregate demand, the resulting increase in public debt, and the consequences of a sovereign debt "haircut" for a member country or bloc of the union. In this union, the governments of participating countries pursue national goals when deciding on fiscal policies, while the common central bank's monetary policy aims at union-wide objective variables. The union considered is asymmetric, consisting of a "core" with lower initial public debt, and a "periphery" with higher initial public debt. The "periphery'' may experience a debt relief ("haircut") due to an evolving high sovereign debt. Calibrating the model to the Euro Area, we calculate numerical solutions of the dynamic game between the governments and the central bank using the OPTGAME algorithm. We show that a "haircut" as modeled in our study is disadvantageous for both the "core" and the "periphery" of the monetary union. Moreover, the cooperative solution is preferable to the noncooperative equilibrium solution (both without and with a "haircut"), providing an argument for coordinated fiscal policies in a monetary union.

Game of Thrones: Accommodating Monetary Policies in a Monetary Union

“…In this paper we extend previous research in [9] and [10] by analysing a three-country monetary union. In contrast to the MUMOD1 model, MUMOD2 consists of a joint central bank and three countries (or blocs of countries): a "core" (country 1) and two periphery countries: a "thrifty" country (2) with high preference for sustainable debt policy and a "thriftless" country (3) with low preference for the sovereign debt target.…”

“…[8]). In previous papers, we developed a small macroeconomic model for a monetary union with some features of the Euro Area and investigated the interaction between monetary and fiscal policy using dynamic game theory ( [9,10]). Using the macroeconomic model MUMOD1 for a monetary union with a joint central bank and two governments (one with high and one with low preferences for balanced budgets versus output, called core and periphery), we determined cooperative and noncooperative fiscal and monetary policies and showed that cooperative policies outperform noncooperative ones.…”

“…The three countries (or blocs of countries) forming the union are called the core, thrifty periphery and thriftless periphery. The distinction between a core of countries with relatively sound public finances and a periphery with high public debt and deficits is often invoked when analysing the tensions in the Euro Area and has also been used in previous work by us [9,10]. What is new here is the splitting of the periphery into a country (or a bloc of countries) which aims at reducing its public debt more quickly, even at the price of slower recovery from the slump, and a country (or a bloc of countries) with a dominant preference for curbing growth and employment in the short run, even at the expense of still higher public debt.…”

United we stand: on the macroeconomics of a Fiscal union

“…This model is called MUMOD1 and is essentially the same as the one introduced in Neck and Blueschke (2014). For a similar framework in continuous time, see Aarle et al (2002).…”

“…This may temporarily prevent state bankruptcy in the overindebted countries, but the medium and long run consequences are less clear, and the acceptance of such transfers by taxpayers in the donating countries is certainly limited, in spite of appeals to European solidarity. In a previous paper (Neck and Blueschke 2014), we have shown in a dynamic game model of a monetary union that such a ''haircut'' for indebted countries may lead to disadvantages, not only for the donors but also for the receiving countries due to their subsequent exclusion from financial markets and increased risk premiums for the interest on their public debt. The development of Greece since the first debt relief seems to corroborate this prediction.…”