Preventing Self-fulfilling debt crises

Szkup, Michal (2017): Preventing Self-fulfilling debt crises.

Abstract

This paper asks whether a government can implement policies that help to avert a crisis driven by self-fulfilling expectations. I consider two policies that are often at the center of political discussions, namely austerity and fiscal stimulus. I find that under plausible conditions austerity tends to decrease the probability of a debt crisis, while stimulus tends to increase it. I also show that endogenous expectations amplify the effects of government policies so that even a small policy adjustment can have significant effects. Finally, I find that policy uncertainty further increases the attractiveness of austerity versus stimulus, but tends to decrease the overall impact of both policies.

• Item Type: MPRA Paper
• Language: English
• Keywords: sovereign debt crises, expectations, policy uncertainty, taxes, fiscal stimulus
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems

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