The Mystery of the Printing Press: Monetary Policy and Self-Fulfilling Debt Crises

Giancarlo Corsetti and Luca Dedola

Journal of the European Economic Association, 2016, vol. 14, issue 6, 1329-1371

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.

JEL-codes: E58 E63 H63 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (109)

Downloads: (external link)
http://hdl.handle.net/10.1111/jeea.12184 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
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” monetary policy and self-fulfilling debt crises (2014)
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:oup:jeurec:v:14:y:2016:i:6:p:1329-1371.

Access Statistics for this article

Journal of the European Economic Association is currently edited by Romain Wacziarg

More articles in Journal of the European Economic Association from European Economic Association
Bibliographic data for series maintained by Oxford University Press ().