“Whatever It Takes” Is All You Need: Monetary Policy and Debt Fragility

Author:

Camous Antoine1,Cooper Russell2

Affiliation:

1. University of Mannheim, Department of Economics, L7 3-5 68131 Mannheim, Germany (email: )

2. European University Institute, Department of Economics, Via della Fontanelle 18, 50014 San Domenico di Fiesole, Firenze, Italy, and Penn State University, Department of Economics (email: )

Abstract

The valuation of government debt is subject to strategic uncertainty. Pessimistic lenders, fearing default, bid down the price of debt, leaving a government with a higher debt burden. This increases the likelihood of default, thus confirming the pessimism of lenders. Can monetary interventions mitigate debt fragility? With one-period commitment to a state-contingent policy, the monetary authority can indeed overcome strategic uncertainty. Under discretion, debt fragility remains unless reputation effects are sufficiently strong. Simpler forms of interventions, such as an inflation target, cannot eliminate debt fragility. (JEL E31, E43, E52, E62, G01, H63)

Publisher

American Economic Association

Subject

General Economics, Econometrics and Finance

Cited by 6 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. A non-linear model of public debt with bonds and money finance;Economia Politica;2023-08-02

2. Sovereign Debt Sustainability and Central Bank Credibility;Annual Review of Financial Economics;2022-11-01

3. The Central Bank Strikes Back! Credibility of Monetary Policy under Fiscal Influence;The Economic Journal;2022-10-21

4. Monetary Policy and Sovereign Debt Sustainability;Journal of the European Economic Association;2022-06-23

5. Monetary Independence and Rollover Crises;The Quarterly Journal of Economics;2021-08-16

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