There is an ongoing debate about austerity and stimulus in the Euro zone. Moreover, given the fiscal and financial problems in the region, a default has appeared likely at times. In this context, this paper develops a dynamic stochastic quantitative model of sovereign default with fiscal policy,...

We develop a dynamic stochastic quantitative model of sovereign default featuring fiscal policy, endogenous financial aid and risk-averse foreign lenders, in order to explore the role of financial aid in a default episode. After calibrating the model, we feed output shocks into the model to show...