Monetary Independence and Rollover Crises

Javier Bianchi and Jorge Mondragon

The Quarterly Journal of Economics, 2022, vol. 137, issue 1, 435-491

Abstract: This article 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 to the Eurozone debt crisis, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis. Finally, we argue that a lender of last resort can go a long way toward reducing the costs of giving up monetary independence.

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