Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/58347 
Year of Publication: 
2012
Series/Report no.: 
CESifo Working Paper No. 3821
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We test the hypothesis that the government bond markets in the Eurozone are more fragile and more susceptible to self-fulfilling liquidity crises than in stand-alone countries. We find evidence that a significant part of the surge in the spreads of the PIGS countries in the Eurozone during 2010-11 was disconnected from underlying increases in the debt to GDP ratios and fiscal space variables, and was the result of negative self-fulfilling market sentiments that became very strong since the end of 2010. We argue that this can drive member countries of the Eurozone into bad equilibria. We also find evidence that after years of neglecting high government debt, investors became increasingly worried about this in the Eurozone, and reacted by raising the spreads. No such worries developed in stand-alone countries despite the fact that debt to GDP ratios and fiscal space variables were equally high and increasing in these countries.
Subjects: 
Eurozone
multiple equilibria
self-fulfilling crises
JEL: 
F00
Document Type: 
Working Paper
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