There is an ongoing debate about austerity and stimulus in the Euro zone. Moreover, given the fiscal and financial …

Austerity measures are frequently enacted when the sustainability of public finances is in doubt. Such doubts are … reflected in high sovereign yield spreads and put further strain on government finances. Is austerity successful in restoring … economic activity. The conditions under which austerity takes place are crucial. During times of fiscal stress, spreads rise in …

Policy makers often implement austerity measures when the sustainability of public finances is in doubt and, hence …, sovereign yield spreads are high. Is austerity successful in bringing about a reduction in yield spreads? We employ a new panel … government consumption on yield spreads and economic activity. The conditions under which austerity takes place are crucial …

Does fiscal austerity influence sovereign debt spreads in a state-dependent manner? To investigate this, we develop an …-dependent spreads. Under high financial stress, austerity raises spreads because the economic slowdown outweighs the reduced debt … accumulation. Under low financial stress, fiscal austerity can decrease spreads. Second, the interplay of default risk and debt …