Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis

R. Braun and Tomoyuki Nakajima

No 12-E-02, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We compare the dynamics of inflation and bond yields leading up to a sovereign debt crisis in settings where asset markets are frictionless to other settings with financial frictions. As compared to the case with frictionless asset markets, an asset market structure with financial frictions generates a significant delay in the response of prices to news about a future debt crisis. With complete markets prices jump in response to news about the possibility of a future debt crisis. However, when short selling of government bonds is restricted some agents can't act on their beliefs and prices don't respond to the news. Instead prices only move in periods immediately prior the crisis.

Keywords: Sovereign Debt Crisis; Deflation; Fiscal Risk; Leverage; Borrowing Constraint (search for similar items in EconPapers)
JEL-codes: E31 E62 H60 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.imes.boj.or.jp/research/papers/english/12-E-02.pdf (application/pdf)

Related works:
Journal Article: Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis (2018)
Working Paper: Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis (2011)
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:ime:imedps:12-e-02

Access Statistics for this paper

More papers in IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Kinken ().