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On the Optimal Speed of Sovereign Deleveraging with Precautionary Savings

Author

Listed:
  • Thomas Philippon

    (New York University
    NBER and CEPR)

  • Francisco Roldán

    (New York University)

Abstract

We study the interaction between sovereign risk and aggregate demand. We obtain two main results. First, the aggregate demand channel creates a trade-off between the recessionary impact of fiscal consolidation and the risk of a future sovereign debt crisis. Risk aversion has a large impact on output losses and on welfare. Second, we find that savers and borrowers disagree about the optimal path of sovereign deleveraging. The sovereign risk channel can therefore explain some of the rise in political disagreement about fiscal policy. We use a calibrated version of the model to shed light on sovereign deleveraging in the Eurozone.

Suggested Citation

  • Thomas Philippon & Francisco Roldán, 2018. "On the Optimal Speed of Sovereign Deleveraging with Precautionary Savings," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(2), pages 375-413, June.
    • Handle: RePEc:pal:imfecr:v:66:y:2018:i:2:d:10.1057_s41308-018-0054-8
    DOI: 10.1057/s41308-018-0054-8
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    Cited by:

    1. Javier Andres & Oscar Arce & Dominik Thaler & Carlos Thomas, 2020. "When Fiscal Consolidation Meets Private Deleveraging," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 214-233, July.
    2. Javier Andres & Oscar Arce & Dominik Thaler & Carlos Thomas, 2020. "When Fiscal Consolidation Meets Private Deleveraging," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 214-233, July.

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G2 - Financial Economics - - Financial Institutions and Services
    • N2 - Economic History - - Financial Markets and Institutions

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