"Whatever it takes" is all you need: monetary policy and debt fragility

Russell Cooper and Antoine Camous

No 863, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: The valuation of government debt is subject to strategic uncertainty. Pessimistic lenders, fearing default, bid down the price of debt, leaving a government with a higher debt burden. This increases the likelihood of default and thus confirming the pessimism of lenders. Can monetary interventions mitigate debt fragility? With one-period 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. Simpler forms of interventions, such as an inflation target, cannot eliminate debt fragility

Date: 2016
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
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Journal Article: "Whatever It Takes" Is All You Need: Monetary Policy and Debt Fragility (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:863

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