Alexandre Lucas Cole, Chiara Guerello & Guido Traficante (2023), Government debt deleveraging in the EMU, International Economics, Volume 173, May 2023, Pages 296-324, https://doi.org/10.1016/j.inteco.2023.01.002

Abstract:
We evaluate the stabilization properties of several rules and instruments to reduce government
debt in a Currency Union, like the EMU. In a two-country New-Keynesian DSGE model, with
a debt-elastic government bond spread and incomplete international financial markets, we
study the effects of government debt deleveraging, under different scenarios for fiscal policy
coordination. We find that greater stabilization is achieved when the two countries coordinate
by stabilizing net exports. Moreover, we find that taxes are a better instrument for deleveraging
compared to government transfers. Our policy prescriptions for the Euro Area are to reduce
government debt less during recessions and liquidity traps, and to do so using distortionary
taxes, while concentrating on reducing international demand imbalances.

Published version: https://authors.elsevier.com/a/1gWFb7VwmARHpL
Free access pre-print version: https://mpra.ub.uni-muenchen.de/116000/1/MPRA_paper_116000.pdf