Monetary Policy under a Fiscal Theory of Sovereign Default
AbstractThis paper examines equilibrium determination under different monetary policy regimes when the government might default on its debt. We apply a cash-in-advance model where the government does not have access to non-distortionary taxation and does not account for initial outstanding debt when it sets the income tax rate. Solvency is then not guaranteed and sovereign default can affect the return on public debt. If the central bank sets the interest rate in a conventional way, the equilibrium allocation cannot be determined. If, instead, money supply is controlled, the equilibrium allocation can uniquely be determined.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-093/2.
Date of creation: 06 Nov 2009
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Equilibrium determination; interest rate policy; money supply; public debt; sovereign default;
Other versions of this item:
- Schabert, Andreas, 2010. "Monetary policy under a fiscal theory of sovereign default," Journal of Economic Theory, Elsevier, vol. 145(2), pages 860-868, March.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-15 (All new papers)
- NEP-CBA-2010-05-15 (Central Banking)
- NEP-MON-2010-05-15 (Monetary Economics)
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