Kriwoluzky, AlexanderMüller, Gernot J.Wolf, Martin2016-04-272016-04-272016-04http://hdl.handle.net/10230/26192Membership in a currency union is not irreversible. Exit expectations may emerge during sovereign debt crises, because exit allows countries to reduce their liabilities through a currency redenomination. As market participants anticipate this possibility, sovereign debt crises intensify. We establish this formally within a small open economy model of changing policy regimes. The model permits explosive dynamics of debt and sovereign yields inside currency unions and allows us to distinguish between exit expectations and those of an outright default. By estimating the model on Greek data, we quantify the contribution of exit expectations to the crisis dynamics during 2009–2012.application/pdfengThis is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.info:eu-repo/semantics/workingPaperCurrency unionSovereign debt crisisFiscal policyRedenomination premiumEuro crisisRegime-switching modelinfo:eu-repo/semantics/openAccess