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Working Papers (1996), ESSEC Business School

The risk of Default on Public Debts in a Monetary Union : The Case for a European Compensation Fund

SOUVETON R., VRANCEANU Radu

A core group of European Union members is close to setting up a monetary union, but wish to keep fiscal policies decentralized. In this particular framework, this paper aims at analyzing the role played by the default risk on Treasury bonds. We focus on the interactions between the risk-adjusted interest rate and several main macroeconomic variables like income, public debt and government spending. In particular, our analysis suggests that a "European Compensation Fund" would provide support for countries affected by adverse shocks.

SOUVETON, R. and VRANCEANU, R. (1996). The risk of Default on Public Debts in a Monetary Union : The Case for a European Compensation Fund. ESSEC Business School.