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- Title
The productivity cost of sovereign default: evidence from the European debt crisis.
- Authors
Alonso-Ortiz, Jorge; Colla, Esteban; Da-Rocha, José-María
- Abstract
We calibrate the cost of sovereign defaults using a continuous time model, where government default decisions may trigger a change in the regime of a stochastic TFP process. We calibrate the model to a sample of European countries from 2009 to 2012. By comparing the estimated drift in default relative to that in no-default, we find that TFP falls in the range of 3.70-5.88 %. The model is consistent with observed falls in GDP growth rates and subsequent recoveries and illustrates why fiscal multipliers are small during sovereign debt crises.
- Subjects
EUROPEAN Union countries; EUROPEAN Sovereign Debt Crisis, 2009-2018; FINANCIAL crises; DEFAULT (Finance); INDUSTRIAL productivity; GROSS domestic product
- Publication
Economic Theory, 2017, Vol 64, Issue 4, p611
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-015-0939-y