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Economies 2016, 4(2), 9; doi:10.3390/economies4020009

Modelling Monetary and Fiscal Governance in the Wake of the Sovereign Debt Crisis in Europe

ESB Business School, Reutlingen University, Alteburgstraße 150, Reutlingen D-72762, Germany
Academic Editor: Ralf Fendel
Received: 14 January 2016 / Revised: 22 April 2016 / Accepted: 25 April 2016 / Published: 5 May 2016
View Full-Text   |   Download PDF [242 KB, uploaded 5 May 2016]

Abstract

This paper analyzes different government debt relief programs in the European Monetary Union. I build a model and study different options ranging from debt relief to the European Stability Mechanism (ESM). The analysis reveals the following: First, patient countries repay debt, while impatient countries more likely consume and default. Second, without ESM loans, indebted countries default anyway. Third, if the probability to be an impatient government is high, then the supply of loans is constrained. In general, sustainable and unsustainable governments should be incentivized differently especially in a supranational monetary union. Finally, I develop policy recommendations for the ongoing debate in the Eurozone. View Full-Text
Keywords: European Monetary Union; debt relief; debt crisis; European Stability Mechanism European Monetary Union; debt relief; debt crisis; European Stability Mechanism
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

Herzog, B. Modelling Monetary and Fiscal Governance in the Wake of the Sovereign Debt Crisis in Europe. Economies 2016, 4, 9.

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