Seigniorage and Sovereign Default: The Response of Emerging Markets to COVID-19
Abstract: Monetary policy affects the tradeoffs faced by governments in sovereign default models. In the absence of lump-sum taxation, governments rely on both disortionary taxes and seigniorage to finance expenditure. Furthermore, monetary policy adds a time-consistency problem in debt choice, which may mitigate or exacerbate the incentives to accumulate debt. A deterioration of the terms-of-trade leads to an increase in sovereign-default risk and inflation, and a reduction in growth, which are consistent with the empirical evidence for emerging economies. An unanticipated shock resembling the COVID-19 pandemic generates a significant currency depreciation, increased inflation, and distress in government finances.
File format is application/pdf
Description: Full Text
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2020-07-10
- Working Paper Revision: Seigniorage and Sovereign Default: The Response of Emerging Markets to COVID-19