Monetary Independence and Rollover Crises
Jorge Mondragon and
Javier Bianchi ()
No 755, Working Papers from Federal Reserve Bank of Minneapolis
This paper 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 autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence.
Keywords: Rollover risk; Monetary unions; Sovereign debt crises (search for similar items in EconPapers)
JEL-codes: E5 F34 G15 E4 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2018-12-03, Revised 2018-12-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Working Paper: Monetary Independence and Rollover Crises (2019)
Working Paper: Monetary Independence and Rollover Crises (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:755
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