Abstract
This paper analyzes how the introduction of Eurobonds affects debt dynamics in a two-country monetary union model. Monetary and fiscal authorities are engaged in dynamic government debt stabilization games in which interest rates on government debt adjust endogenously. Three different equilibria are considered: the non-cooperative Nash open-loop equilibrium, the fiscal coordination equilibrium and the fully cooperative equilibrium. It is shown how the effects of Eurobonds depend on the game-theoretic equilibrium/institutional framework in place, the initial debt levels, policy makers’ concerns with debt stabilization and the strength of financial market discipline.
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