Government debt deleveraging in the EMU

We evaluate the stabilization properties of several rules and instruments to reduce government debt in a Currency Union, like EMU. In two-country New-Keynesian DSGE model, with debt-elastic bond spread incomplete international financial markets, we study effects deleveraging, under different scenarios for fiscal policy coordination. find that greater is achieved when two countries coordinate by stabilizing net exports. Moreover, taxes are better instrument deleveraging compared transfers. Our prescriptions Euro Area less during recessions liquidity traps, do so using distortionary taxes, while concentrating on reducing demand imbalances.