Universität zu Köln

Juessen, Falko, Linnemann, Ludger ORCID: 0000-0001-8210-0002 and Schabert, Andreas ORCID: 0000-0002-4924-9937 (2016). DEFAULT RISK PREMIA ON GOVERNMENT BONDS IN A QUANTITATIVE MACROECONOMIC MODEL. Macroeconomic Dynamics, 20 (1). 380 - 404. NEW YORK: CAMBRIDGE UNIV PRESS. ISSN 1469-8056

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Abstract

We develop a macroeconomic model in which the government does not guarantee to repay debt. We ask whether movements in the price of government bonds can be rationalized by lenders' unwillingness to fully roll over debt when the outstanding level of debt exceeds the government's repayment capacity. Investors do not support a Ponzi game in this case, but ration credit supply, thus forcing default at an endogenously determined fractional repayment rate. Interest rates on government bonds reflect expectations of this event. Numerical results show that default premia can emerge at moderately high debt-to-GDP ratios where even small changes in fundamentals lead to steeply rising interest rates. The behavior of risk premia broadly accords with recent observations for several European countries that experienced a worsening of fundamental fiscal conditions.

Item Type:	Journal Article
Creators:	Creators Email ORCID ORCID Put Code Juessen, Falko UNSPECIFIED UNSPECIFIED UNSPECIFIED Linnemann, Ludger UNSPECIFIED orcid.org/0000-0001-8210-0002 UNSPECIFIED Schabert, Andreas UNSPECIFIED orcid.org/0000-0002-4924-9937 UNSPECIFIED
URN:	urn:nbn:de:hbz:38-291670
DOI:	10.1017/S1365100514000431
Journal or Publication Title:	Macroeconomic Dynamics
Volume:	20
Number:	1
Page Range:	380 - 404
Date:	2016
Publisher:	CAMBRIDGE UNIV PRESS
Place of Publication:	NEW YORK
ISSN:	1469-8056
Language:	English
Faculty:	Central Institutions / Interdisciplinary Research Centers
Divisions:	Weitere Institute, Arbeits- und Forschungsgruppen > Center for Macroeconomic Research (CMR)
Subjects:	Economics
Uncontrolled Keywords:	Keywords Language Economics Multiple languages
Refereed:	Yes
URI:	http://kups.ub.uni-koeln.de/id/eprint/29167