The recent Eurozone debt crisis has witnessed sharp decouplings in cross-country bond yields without commensurate shifts in relative fundamentals. We rationalize this phenomenon in a model wherein countries with different fundamentals are on different equilibrium paths all along, but which...

Recent debt crises in Europe have highlighted the role of asymmetric information about fiscal shocks in accounting for sudden hikes in country risk. We develop a model where such asymmetry of information combined with the persistence of tax shocks can produce a sudden inward shift in the supply...