Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/145047
Authors: 
Philippopoulos, Apostolis
Varthalitis, Petros
Vassilatos, Vanghelis
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 6012
Abstract: 
We build a new Keynesian DSGE model consisting of two heterogeneous countries participating in a monetary union. We study how public debt consolidation in a country with high debt (like Italy) affects welfare in a country with solid public finances (like Germany). Our results show that debt consolidation in the high-debt country benefits the country with solid public finances over all time horizons. By constrast, in Italy, namely the country that takes the consolidation measures, such a policy is productive only in the medium and long term. Thus, although there is a conflict of national interests in shorter horizons, there is a common interest in the medium and long term. All this is with optimized feedback policy rules. By contrast, debt consolidation is welfare inferior to non-consolidation for both countries and all the time, if it is implemented in an ad hoc way, like an increase in income taxes. Therefore, the policy mix is important.
Subjects: 
debt consolidation
Country spillovers
feedback policy rules
new Keynesian
JEL: 
E60
F30
H60
Document Type: 
Working Paper

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