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Central bank and government in a speculative attack model

Giuseppe Cappelletti and Lucia Esposito (lucia.esposito@bancaditalia.it)
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Lucia Esposito: Bank of Italy

No 934, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper studies the interaction between monetary and fiscal authorities while investors are coordinating on a speculative attack. The authorities want to achieve specific targets for output and inflation but also to avoid a regime change (i.e. sovereign default). They use the traditional policy instruments. The model examines the informational role of simultaneous implementation of monetary and fiscal policies in coordination environments. While endogenous information generated by the intervention of one policy maker has been shown to lead to multiple equilibria, we show that if the actions chosen by the central bank and the government not only deliver information to the markets but also influence the fundamentals of the economy, when the authorities have a strong incentive to preserve the status quo over other objectives, then there is no equilibrium in which investors' strategies depend monotonically on their private information on fundamentals.

Keywords: global games; complementarities; signaling; self-fulfilling expectations; multiple equilibria; crises; regime change; policy interactions (search for similar items in EconPapers)
JEL-codes: C7 D8 E5 E6 F3 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-cba, nep-cta, nep-mac and nep-mon
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