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Federal Reserve Bank of Minneapolis
Working Papers
Monetary Independence and Rollover Crises
Javier Bianchi
Jorge Mondragon
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.


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Javier Bianchi & Jorge Mondragon, Monetary Independence and Rollover Crises, Federal Reserve Bank of Minneapolis, Working Papers 755, 03 Dec 2018.
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Subject headings:
Keywords: Sovereign debt crises; Rollover risk; Monetary unions
DOI: 10.21034/wp.755
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