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Heterogeneous Market Beliefs, Fundamentals and the Sovereign Debt Crisis in the Eurozone
Author(s) -
Tamborini Roberto
Publication year - 2015
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12155
Subject(s) - solvency , sovereign default , insolvency , economics , default , debt , monetary economics , government (linguistics) , sovereignty , financial system , sovereign debt , macroeconomics , finance , political science , market liquidity , linguistics , philosophy , politics , law
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.​

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