Heterogeneous Market Beliefs, Fundamentals and the Sovereign Debt Crisis in the Eurozone

The unprecedented sovereign debt crisis across the eurozone has prompted a new generation of models with ‘self‐fulfilling’ attacks on public debt. The model presented in this paper shows that multiple equilibria arise as investors have no direct information, and form heterogeneous rational beliefs, about the government's sustainable limit of the solvency primary balance. If beliefs of insolvency are sufficiently large, then the government is bound to default, although initial solvency conditions are satisfied. Several issues are discussed concerning the role of initial conditions, fiscal shocks and the policy options to escape from the default domain

Debt · Default · Economics · Financial system · Government (linguistics) · Insolvency · Macroeconomics · Market liquidity · Monetary economics · Political science · Solvency · Sovereign debt · Sovereign default · Sovereignty · European Monetary and Fiscal Policies · Finance · Fiscal Policies and Political Economy · Global Financial Crisis and Policies

• This Time Is Different

  Open Access•Carmen M Reinhart, Cornel Reinhart et al.•This Time Is Different•2009

  Añadir item

• The Use of Knowledge in Society

  F A Von Hayek, F Hayek•Knowledge management and…•1996

  Añadir item

• Individualism and Economic Order

  F A Hayek•Individualism and Economic Order•1996

  Añadir item

• Individual Forecasting and Aggregate Outcomes

  Charles Bean, Charles R Bean et al.•Economica•1985

  Añadir item

• Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

  Open Access•Atish R Ghosh, Jun I Kim et al.•The Economic Journal•2013

  Añadir item

• The Macroeconomics of Self-Fulfilling Prophecies

  Nicholas Rau, Roger E A Farmer•The Economic Journal•1995

  Añadir item