Exit expectations and debt crises in currency unions
- Author(s)
- Martin Wolf, Gernot Müller, Alexander Kriwoluzky
- Abstract
We study a sovereign debt crisis in a small member state of a currency union. If the country exits the currency union, it may redenominate its liabilities and reduce the real value of debt through depreciation and inflation. We analyze formally how the anticipation of this possibility, “exit expectations”, impact the dynamics of the sovereign debt crisis. First, we show that public debt accumulates faster and sovereign yields increase more strongly because of redenomination risk. Second, we find that exit expectations induce public debt to be stagflationary. Last, we analyze Greek time-series data through the lens of our model and quantify the contribution of exit expectations to the Greek crisis.
- Organisation(s)
- Department of Economics
- External organisation(s)
- Freie Universität Berlin (FU), Deutsches Institut für Wirtschaftsforschung (DIW), Eberhard Karls Universität Tübingen
- Journal
- Journal of International Economics
- Volume
- 121
- No. of pages
- 13
- ISSN
- 0022-1996
- DOI
- https://doi.org/10.1016/j.jinteco.2019.103253
- Publication date
- 11-2019
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502018 Macroeconomics
- Keywords
- ASJC Scopus subject areas
- Economics and Econometrics, Finance
- Portal url
- https://ucrisportal.univie.ac.at/en/publications/ac62ffb0-6b6f-4842-8a27-3a4a915704c6