Disentangling the Eurozone Crisis: Government Default and Bank Credit in a Business Cycle Model


This research project aims to disentangle the sources of the eurozone crisis using state- of-the-art methods from the literature on sovereign debt defaults and macroeconomic models with financial frictions. The project’s primary goal is to develop and estimate a structural economic model that can explain the joint occurrence of banking crises, government debt crises and economic downturns and is able to quantify empirically the contribution of each of these elements to the eurozone crisis. Its second goal is to use the estimated model to analyze the effect of government interventions in the banking sector (“bail-outs”), the effect of fiscal consolidation measures (“austerity”) and the bond purchase programs of the European Central Bank. The project employs recent advances in the computation of dynamic stochastic general equilibrium models and Bayesian estimation techniques.


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