Austerity*

Dellas, Harris; Niepelt, Dirk (2020). Austerity*. The economic journal, 131(634), pp. 697-712. Wiley 10.1093/ej/ueaa101

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We study the optimal debt and investment decisions of a sovereign with private information. The separating equilibrium is characterized by a cap on the current account. A sovereign repays debt amount due that exceeds default costs in order to signal creditworthiness and smooth consumption. Accepting funding conditional on investment/reforms relaxes borrowing constraints, even when investment does not create collateral, but it depresses current consumption. The model contains the signalling elements emphasized by creditors in the Greek austerity programs and is consistent with the reduction in the loans issued by Greece and their interest rate following the 2015 election.

Item Type:

Journal Article (Original Article)

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Dellas, Harris and Niepelt, Dirk

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

ISSN:

0013-0133

Publisher:

Wiley

Language:

English

Submitter:

Dino Collalti

Date Deposited:

12 Jan 2021 15:00

Last Modified:

08 Mar 2021 01:34

Publisher DOI:

10.1093/ej/ueaa101

BORIS DOI:

10.48350/150696

URI:

https://boris.unibe.ch/id/eprint/150696

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