The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises
Giancarlo Corsetti and
Luca Dedola ()
Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Abstract:
We study the conditions under which unconventional (balance-sheet) monetary policy can rule out self-fulfilling sovereign default in a model with optimizing but discretionary fiscal and monetary policymakers. When purchasing sovereign debt, the central bank effectively swaps risky government paper for monetary liabilities only exposed to inflation risk, thus yielding a lower interest rate. As central bank purchases reduce the (ex ante) costs of debt, we characterize a critical threshold beyond which, absent fundamental fiscal stress, the government strictly prefers primary surplus adjustment to default. Because default may still occur for fundamental reasons, however, the central bank faces the risk of losses on sovereign debt holdings, which may generate inefficient inflation. We show that these losses do not necessarily undermine the credibility of a backstop, nor the monetary authorities’ ability to pursue its inflation objectives. Backstops are credible if either the central bank enjoys fiscal backing or fiscal authorities are sufficiently averse to inflation.
Keywords: Sovereign risk and default; Lender of last resort; Seigniorage; inflationary financing (search for similar items in EconPapers)
JEL-codes: E58 E63 H63 (search for similar items in EconPapers)
Date: 2014-09-19
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: gc422
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)
Downloads: (external link)
https://www.econ.cam.ac.uk/sites/default/files/pub ... pe-pdfs/cwpe1463.pdf
Related works:
Journal Article: THE MYSTERY OF THE PRINTING PRESS: MONETARY POLICY AND SELF-FULFILLING DEBT CRISES (2016) 
Journal Article: The Mystery of the Printing Press: Monetary Policy and Self-Fulfilling Debt Crises (2016) 
Working Paper: The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises (2016) 
Working Paper: The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises (2014) 
Working Paper: The “mystery of the printing press” monetary policy and self-fulfilling debt crises (2014) 
Working Paper: The Mystery of the Printing Press: Self-fulfilling debt crises and monetary sovereignty (2013) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1463
Access Statistics for this paper
More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().