Arbeitspapier

Austerity

We shed light on the function, properties and optimal size of austerity using the standard sovereign debt model augmented to include incomplete information about credit risk. Austerity is defined as the shortfall of consumption from the level desired by a country and supported by its repayment capacity. We find that austerity serves as a tool for securing a more favourable loan package; that it is associated with over-investment even when investment does not create collateral; and that low risk borrowers may favour more to less severe austerity. These findings imply that the amount of fresh funds obtained by a sovereign is not a reliable measure of austerity suffered; and that austerity may actually be associated with higher growth. Our analysis accommodates costly signaling for gaining credibility and also assigns a novel role to spending multipliers in the determination of optimal austerity.

Language
Englisch

Bibliographic citation
Series: CESifo Working Paper ; No. 5146

Classification
Wirtschaft
International Lending and Debt Problems
National Debt; Debt Management; Sovereign Debt
Subject
austerity
credit rationing
default
incomplete information
investment
growth
pooling equilibrium
separating equilibrium

Event
Geistige Schöpfung
(who)
Dellas, Harris
Niepelt, Dirk
Event
Veröffentlichung
(who)
Center for Economic Studies and ifo Institute (CESifo)
(where)
Munich
(when)
2014

Handle
Last update
06.03.2025, 11:37 AM CET

Data provider

This object is provided by:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.

Object type

  • Arbeitspapier

Associated

  • Dellas, Harris
  • Niepelt, Dirk
  • Center for Economic Studies and ifo Institute (CESifo)

Time of origin

  • 2014

Other Objects (12)