Alternative fiscal and monetary policies under financial fragility and sovereign default risk in a currency union (eurozone)

In the proposed research we will investigate the intermingling of financial crises and sovereign default risk. The current eurozone crisis shows the interconnection between problems in the financial sector, which can start a recession, and fiscal problems, which are exacerbated by a recession, but in turn may complicate financial bail outs necessary to resolve the initial financial sector problems. By developing a two country model that contains a financial sector that is balance sheet constrained, and governments that may default, we can replicate the current eurozone troubles and assess different government policies to solve the current crisis.