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Monetary Independence and Rollover Crises

Jorge Mondragon and Javier Bianchi ()

No 755, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: 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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Related works:
Working Paper: Monetary Independence and Rollover Crises (2019)
Working Paper: Monetary Independence and Rollover Crises (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:755

DOI: 10.21034/wp.755

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