Kriwoluzky, Alexander; Müller, Gernot; Wolf, Martin - C.E.P.R. Discussion Papers - 2013
Sovereign yield spreads within currency unions may reflect the risk of outright default. Yet, if exit from the currency … union is possible, spreads may also reflect currency risk. In this paper, we develop a New Keynesian model of a small member … country of a currency union, allowing both for default within and exit from the union. Initially, the government runs …