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Is it is or is it Ain't my Obligation? Regional Debt in Monetary Unions

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Author Info
Russell Cooper
Hubert Kempf
Dan Peled

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Abstract

This paper studies the implications of the circulation of interest bearing regional debt in a monetary union. Does the circulation of this debt have the same monetary implications as the printing of money by a central government? Or are the obligations of this debt simply backed by future taxation with no inflationary consequences? We argue here that both outcomes can arise in equilibrium. In the model economy we consider there are multiple equilibria which reflect the perceptions of agents regarding the manner in which the debt obligations will be met. In one equilibrium, termed Ricardian, the future obligations are met with taxation by a regional government while in the other, termed Monetization, the central bank is induced to print money to finance the region's obligations. The multiplicity of equilibria reflects a commitment problem of the central bank. A key indicator of the selected equilibrium is the distribution of the holdings of the regional debt. We use the model to assess the impact of policy measures, such as fiscal restrictions, within a monetary union.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10239.

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Date of creation: Jan 2004
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Handle: RePEc:nbr:nberwo:10239

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Find related papers by JEL classification:
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Russell Cooper & Hubert Kempf, 2000. "Designing Stabilization Policy in a Monetary Union," Boston University - Institute for Economic Development 99, Boston University, Institute for Economic Development. [Downloadable!]
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  2. Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1165-82, December. [Downloadable!] (restricted)
  3. Bruce, Neil & Waldman, Michael, 1990. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 155-65, February. [Downloadable!] (restricted)
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  4. V. V. Chari & Patrick J. Kehoe, 1998. "On the need for fiscal constraints in a monetary union," Working Papers 589, Federal Reserve Bank of Minneapolis.
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  5. Smith, Bruce D, 1994. "Efficiency and Determinacy of Equilibrium under Inflation Targeting," Economic Theory, Springer, vol. 4(3), pages 327-44.
  6. Bergstrom, Theodore C, 1989. "A Fresh Look at the Rotten Kid Theorem--and Other Household Mysteries," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1138-59, October. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hubert KEMPF, 2006. "The Constitutional Treaty of the EU and the institutional framework," Departemental Working Papers 2006-05, Department of Economics University of Milan Italy. [Downloadable!]
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