Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis
AbstractWe compare the dynamics of inflation and bond yields leading up to a sovereign debt crisis in settings where asset markets are frictionless to other settings with financial frictions. As compared to the case with frictionless asset markets, an asset market structure with financial frictions generates a significant delay in the response of prices to news about a future debt crisis. With complete markets prices jump in response to news about the possibility of a future debt crisis. However, when short selling of government bonds is restricted some agents can't act on their beliefs and prices don't respond to the news. Instead prices only move in periods immediately prior the crisis.
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Bibliographic InfoPaper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 12-E-02.
Date of creation: Mar 2012
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Sovereign Debt Crisis; Deflation; Fiscal Risk; Leverage; Borrowing Constraint;
Other versions of this item:
- R. Anton Braun & Tomoyuki Nakajima, 2011. "Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis," KIER Working Papers 796, Kyoto University, Institute of Economic Research.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
- NEP-DGE-2012-03-28 (Dynamic General Equilibrium)
- NEP-MAC-2012-03-28 (Macroeconomics)
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