Effects of debt mutualization in a monetary union with endogenous risk premia: Can Eurobonds contribute to debt stabilization?

This paper analyses debt stabilization in a monetary union that features endogenous risk premia. In particular, debt stabilization in two diametrically opposed regimes is compared. In the first regime, the “national fiscal discipline regime”, financial markets impose sovereign risk premia based on each country's government debt level. In the second regime, the “Eurobonds regime”, financial markets impose a risk premium based on the average debt level in the monetary union. Outcomes in both regimes are compared using simulations of a number of relevant scenarios.