Austerity measures are frequently enacted when the sustainability of public finances is in doubt. Such doubts are reflected in high sovereign yield spreads and put further strain on government finances. Is austerity successful in restoring market confidence, bringing about a reduction in yield...

A growing recent literature relies on a precautionary pricing motive embedded in representative agent DSGE models with sticky prices and wages to generate negative output effects of uncertainty shocks. We assess whether this model channel is consistent with the data. We build a New Keynesian...