EconPapers    
Economics at your fingertips  
 

Self-Fulfilling Debt Crises: Can Monetary Policy Really Help?

Eric van Wincoop and Philippe Bacchetta ()
Additional contact information
Eric van Wincoop: University of Virginia

No 925, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper examines quantitatively the potential for monetary policy to avoid self-fulfilling sovereign debt crises. We combine a version of the slow-moving debt crisis model proposed by Lorenzoni and Werning (2014) with a standard New Keynesian model. We consider both conventional and unconventional monetary policy. With price rigidity, the real cost of debt can be reduced through lower real interest rates. On the other hand, deflation of long-term debt is less effective and requires higher inflation rates. In general, we show that crisis equilibria can only be avoided with steep inflation rates for a sustained period of time, the cost of which is likely to be much larger than government default.

New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

Downloads: (external link)
https://economicdynamics.org/meetpapers/2015/paper_925.pdf (application/pdf)

Related works:
Working Paper: Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? (2015) Downloads
Working Paper: Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? (2015) Downloads
Working Paper: Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? (2015) Downloads
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:red:sed015:925

Access Statistics for this paper

More papers in 2015 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2019-03-31
Handle: RePEc:red:sed015:925