Sovereign Debt Booms in Monetary Unions

Mark Aguiar, Manuel Amador, Emmanuel Farhi and Gita Gopinath

American Economic Review, 2014, vol. 104, issue 5, 101-06

Abstract: We propose a continuous time model to investigate the impact of inflation credibility on sovereign debt dynamics. At every point in time, an impatient government decides fiscal surplus and inflation, without commitment. Inflation is costly, but reduces the real value of outstanding nominal debt. In equilibrium, debt dynamics is the result of two opposing forces: (i) impatience and (ii) the desire to conquer low inflation. A large increase in inflation credibility can trigger a process of debt accumulation. This rationalizes the sovereign debt booms that are often experienced by low inflation credibility countries upon joining a currency union.

JEL-codes: E31 E43 F33 H63 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/aer.104.5.101
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Citations: View citations in EconPapers (25)

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Working Paper: Sovereign Debt Booms in Monetary Unions (2014)
Working Paper: Sovereign Debt Booms in Monetary Unions
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