Rules and risk in the euro area
Anna Iara Guntram B. WolffEuropean Macroeconomics & Governance
Anna Iara and Guntram Wolff develop a model of sovereign spreads that are determined by the probability of default in interaction with the level of risk aversion. Estimation of the model confirms the central predictions. The legal basis for the rules, and mechanisms for enforcing them, are the most important dimensions of rulesbased fiscal governance.