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

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  • Russell Cooper
  • Hubert Kempf
  • Dan Peled

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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Bibliographic Info

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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Publication status: published as Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is It Is Or Is It Ain'T My Obligation? Regional Debt In A Fiscal Federation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1469-1504, November.
Handle: RePEc:nbr:nberwo:10239

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  1. Smith, Bruce D, 1994. "Efficiency and Determinacy of Equilibrium under Inflation Targeting," Economic Theory, Springer, Springer, vol. 4(3), pages 327-44.
  2. 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.
  3. Russell W. Cooper & Hubert Kempf, 2000. "Designing Stabilization Policy in a Monetary Union," NBER Working Papers 7607, National Bureau of Economic Research, Inc.
  4. Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(6), pages 1165-82, December.
  5. Bergstrom, Theodore C, 1989. "A Fresh Look at the Rotten Kid Theorem--and Other Household Mysteries," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(5), pages 1138-59, October.
  6. Bruce, Neil & Waldman, Michael, 1990. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 155-65, February.
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Cited by:
  1. Hubert KEMPF, 2006. "The Constitutional Treaty of the EU and the institutional framework," Departmental Working Papers, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano 2006-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.

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