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SOVEREIGN RESTRUCTURING VS. FISCAL ADJUSTMENT IN A MONETARY UNION: MACROECONOMIC EFFECTS FROM MODEL-BASED SIMULATIONS

Published online by Cambridge University Press:  01 March 2018

L. Forni  and
M. Pisani
L. Forni*
Affiliation:
University of Padua
M. Pisani
Affiliation:
Bank of Italy
*
Address correspondence to: Lorenzo Forni, Departments of Economics, Università di Padova, Via del Santo 33 - I-35123 Padova, Italy; e-mail: [email protected].
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Abstract

We assess the macroeconomic effects of a sovereign restructuring in a small economy belonging to a monetary union by simulating a dynamic general equilibrium model. We compare the macroeconomic outcome of restructuring with scenarios where the debt reduction is achieved via fiscal adjustment. In line with the empirical evidence, we assume that the sovereign debt is held by domestic agents and by agents in the rest of the monetary union; after the restructuring the sovereign borrowing rate increases and the increase is fully transmitted to the domestic households' borrowing rate; and the government cannot discriminate between domestic and foreign agents when restructuring. We also assume that the small economy does not exit from the monetary union after the restructuring and that the restructuring does not have systemic effects on the rest of the union. Our results suggest that the restructuring can imply persistent and large reduction of output, especially if the share of public debt held domestically is large, the private foreign debt is high, and the spread paid by the government and the households does increases.

Keywords

Fiscal PolicyDSGE ModelingSovereign Restructuring
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 2 , March 2018 , pp. 470 - 500
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

We thank for useful comments C. Cottarelli, C. Kamps, A. Locarno, D. Muir, M. Guerguil, P. Manasse, A. Notarpietro, and participants at the ECB Workshop “Challenges for Sovereign Debt Management in the EU” (October 2011) and the Bank of Poland “Central Bank Macroeconomic Modeling Workshop” (September 2012) and in seminars at the IMF Fiscal Affair Department (November 2011) and the University of Bologna (December 2011). We are solely responsible for any errors. The opinions expressed in this paper do not necessarily reflect those of the Bank of Italy or the Eurosystem or the International Monetary Fund.

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