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Federal Reserve Bank of Minneapolis
Monetary Independence and Rollover Crises
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.
Cite this item
Javier Bianchi & Jorge Mondragon, Monetary Independence and Rollover Crises, Federal Reserve Bank of Minneapolis, Working Papers 755, 03 Dec 2018.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
Keywords: Sovereign debt crises; Rollover risk; Monetary unions
This item with handle RePEc:fip:fedmwp:755
is also listed on EconPapers
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