Monetary Policy and Debt Fragility

Antoine Camous and Russell Cooper

No 20650, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The valuation of government debt is subject to strategic uncertainty, stemming from investors' sentiments. Pessimistic lenders, fearing default, bid down the price of debt. This leaves a government with a higher debt burden, increasing the likelihood of default and thus confirming the pessimism of lenders. This paper studies the interaction of monetary policy and debt fragility. It asks: do monetary interventions mitigate debt fragility? The answer depends in part on the nature of monetary policy, particularly the ability of the monetary authority to commit to future state contingent actions. With commitment to a state contingent policy, the monetary authority can indeed overcome strategic uncertainty. Under discretion, debt fragility remains unless reputation effects are sufficiently strong.

JEL-codes: E42 E58 E63 F33 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published as Antoine Camous & Russell Cooper, 2019. "'Whatever It Takes' Is All You Need: Monetary Policy and Debt Fragility," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 38-81, October.

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