Abstract: This paper uses Bayesian methods to estimate a real business cycle model that allows for interactions among fiscal policy instruments, the stochastic fiscal limit and sovereign default. Using the particle filter to perform likelihood-based inference, we estimate the full nonlinear model with post-EMU data until 2010:Q4. We find that (i) the probability of default on Greek debt was in the range of 5-10% in 2010:Q4 and (ii) the 2011 surge in the Greek real interest rate is within model forecast bands. The results suggest that a nonlinear rational expectations environment can account for the Greek interest rate path.

Replication data for peer-reviewed article published in Journal of Applied Econometrics. Paper published online July 18 2014. When citing this dataset, please also cite the associated article. A sample Publication Citation is provided below.