Public debt, default risk and the European monetary union

Lines connect the coordinator with its partners. CORDIS does not always give exact coordinates for projects before 2014. These points are placed at city or country level.

Project objective

Research objectives and content The purpose of the research is to investigate the possibility of defaulting on public debt. The issue is particularly relevant for those countries which have to deal with a very large public debt and, at the same time, are aiming to join EMU. I intend to analyse how the picture changes when one moves from a situation in which both inflation and default are available instruments of debt reduction to a situation in which inflation is no longer available. To this end, I will take a 'political economy' approach in which an optimising policymaker has to finance a stochastic flow of public spending. The introduction of such a source of uncertainty in the government budget constraint allows me to determine default probability endogenously. A calibration exercise of the theoretical model, involving European countries, is also planned. Finally the theoretical work will be supported by investigation of the nature of the risk premia incorporated in government bonds. The aim is to study the empirical relationship between risk premia and fiscal variables. Financial swap data will be used to measure the size of default risk on government bonds Training content (objective, benefit and expected impact) The opportunity of a PhD programme at the University of Warwick is a valuable experience of research work, giving me training dealing with theoretical and empirical issues and using advanced research techniques. I consider this experience a key step in acquiring the skills required for a future research career. Links with industry / industrial relevance (22) The research is of great relevance for the banking industry, in particular when financial institutions hold a significant amount of government debt in their portfolios.

Original text from CORDIS.

Participants

• UNIVERSITY OF WARWICK · COVENTRYCoordinatorUnited Kingdom
• Not availableCity levelItaly

Links

• View on CORDIS