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Austerity*
Journal article

Austerity*

  • Dellas, Harris Department of Economics, University of Bern, Schanzeneckstrasse 1, 3012 Bern, Switzerland
  • Niepelt, Dirk Department of Economics, University of Bern, Schanzeneckstrasse 1, 3012 Bern, Switzerland
  • 2020-8-31
Published in:
  • The Economic Journal. - Oxford University Press (OUP). - 2020
Economics and Econometrics
English Abstract
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.
Language
  • English
Open access status
closed
Identifiers
Persistent URL
https://sonar.ch/global/documents/263746
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