Monetary Independence and Rollover Crises

Javier Bianchi and Jorge Mondragon

No 25340, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary independence, lenders anticipate that the government would face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. In a quantitative application, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis during 2011-2012. Finally, we argue that a lender of last resort can go a long way towards reducing the costs of giving up monetary independence.

JEL-codes: E4 E5 F34 G15 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac, nep-mon and nep-opm
Note: AP EFG IFM ME
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Citations: View citations in EconPapers (23)

Published as Javier Bianchi & Jorge Mondragon, 2021. "Monetary Independence and Rollover Crises," The Quarterly Journal of Economics, vol 137(1), pages 435-491.

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Related works:
Journal Article: Monetary Independence and Rollover Crises (2022)
Working Paper: Monetary Independence and Rollover Crises (2019)
Working Paper: Monetary Independence and Rollover Crises (2018)
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