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The blue bond proposal in the presence of spillover effects
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I show that a Blue and Red Bonds format of debt mutualisation can be beneficial for the assistance-providing countries and that the benefit from joining such scheme depends positively on the size of a fixed default output cost and negatively on the threshold for the issuance of blue bonds .I assume the presence of spill over effects and compare the resources of Core, the fiscally responsible country in the union, under the Blue Bond scheme against the case of no debt mutualisation and show the difference between both schemes under different output shock realizations. I also present a formula for the expected difference in resources for both formats and solve the model for different values of the most relevant parameters.
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Interest rates Fiscal policy Eurobonds Sovereign debt