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Debt stabilization games in a monetary union: What are the effects of introducing eurobonds?

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  • Engwerda, Jacob
  • van Aarle, Bas
  • Anevlavis, Tzanis

Abstract

This paper analyzes how the introduction of Eurobonds affects debt dynamics in a two-country monetary union model. Monetary and fiscal authorities are engaged in dynamic government debt stabilization games in which interest rates on government debt adjust endogenously. Three different equilibria are considered: the non-cooperative Nash open-loop equilibrium, the fiscal coordination equilibrium and the fully cooperative equilibrium. It is shown how the effects of Eurobonds depend on the game-theoretic equilibrium/institutional framework in place, the initial debt levels, policy makers’ concerns with debt stabilization and the strength of financial market discipline.

Suggested Citation

  • Engwerda, Jacob & van Aarle, Bas & Anevlavis, Tzanis, 2019. "Debt stabilization games in a monetary union: What are the effects of introducing eurobonds?," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 78-102.
    • Handle: RePEc:eee:jmacro:v:59:y:2019:i:c:p:78-102
    DOI: 10.1016/j.jmacro.2018.11.008
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    Cited by:

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    3. Barucci, Emilio & Brachetta, Matteo & Marazzina, Daniele, 2023. "On the feasibility of a debt redemption fund," Economic Modelling, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    Debt stabilization; Monetary union; Non-linear dynamical systems; Risk premium; Eurobonds;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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