Monetary Independence and Rollover Crises

Javier Bianchi

No 1367, 2019 Meeting Papers from Society for Economic Dynamics

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.

Date: 2019
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Related works:
Journal Article: Monetary Independence and Rollover Crises (2022)
Working Paper: Monetary Independence and Rollover Crises (2018)
Working Paper: Monetary Independence and Rollover Crises (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1367

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