Regional debt in monetary unions: is it inflationary?

Russell Cooper, Hubert Kempf () and Dan Peled ()

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: This paper studies the inflationary implications of interest bearing regional debt in a monetary union. Is this debt simply backed by future taxation with non inflationary consequences?. Or will the circulation of region debt induce monetization by a central bank?. We argue here that both outcomes can arise in equilibrium. In the model economy, there are multiple equilibria which reflect the perceptions of agents regarding the manner in which the debt obligations will be met. In one equilibrium, termed Ricardian, the future obligations are met with taxation by a regional government while in the other, termed Monetization, the central bank is induced to print money to finance the region's obligations. The multiplicity of equilibria reflects a commitment problem of the central bank. A key indicator of the selected equilibrium is the distribution of the holdings of the regional debt. We show that regional governments, anticipating central bank financing of their debt obligations, have an incentive to create excessively large deficits. We use the model to assess the impact of policy measures within a monetary union

Keywords: Monetary union; inflation tax; Seigniorage; public debt (search for similar items in EconPapers)
JEL-codes: E31 E42 E58 E62 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2008-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
ftp://mse.univ-paris1.fr/pub/mse/CES2008/V08070.pdf (application/pdf)

Related works:
Journal Article: Regional debt in monetary unions: Is it inflationary? (2010)
Working Paper: Regional Debt in Monetary Unions: Is it Inflationary? (2010)
Working Paper: Regional Debt in Monetary Unions: Is it Inflationary? (2010)
Working Paper: Regional Debt in Monetary Unions: Is it Inflationary? (2010)
Working Paper: Regional Debt in Monetary Unions: Is it Inflationary ? (2008)
Working Paper: Regional Debt in Monetary Unions: Is it Inflationary ? (2008)
Working Paper: Regional Debt in Monetary Unions: Is it Inflationary? (2007)
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:mse:cesdoc:v08070

Access Statistics for this paper

More papers in Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne Contact information at EDIRC.
Bibliographic data for series maintained by Lucie Label ().