IDEAS home Printed from https://ideas.repec.org/a/kir/journl/v1y2013i1p87-111.html
   My bibliography  Save this article

Inflationary Consequences of the Indebtedness Levels of the Member Countries in a Monetary Union

Author

Listed:
  • Séverine Menguy

    () (Département des Sciences Sociales, Université Paris Descartes, Paris – France)

Abstract

This paper studies the impact on the common monetary policy and the externalities due to various levels of indebtedness of the member countries in a monetary union. While the common central bank conducts a more accommodative monetary policy in order to avoid default of moderately indebted member countries, the most heavily indebted countries have to default. More precisely, the optimal inflation rate increases as the weight given by the central bank to price stability gets smaller, as the number of highly indebted countries in the union grows, and as the share of nominal debt from these countries in the global indebtedness of the monetary union gets higher. Moreover, inflation increases as the interest rate on the risk free capital gets higher and as the interest rate on inflation indexed bonds in fiscally weak countries is reduced. Finally, inflation increases as the incentive effect on the issuing of public debt at a smaller default cost decreases, and then becomes an increasing function of this cost of default in fiscally weak countries.

Suggested Citation

  • Séverine Menguy, 2013. "Inflationary Consequences of the Indebtedness Levels of the Member Countries in a Monetary Union," The Journal of European Theoretical and Applied Studies, The Center for European Studies at Kirklareli University - Turkey, vol. 1(1), pages 87-111.
  • Handle: RePEc:kir:journl:v:1:y:2013:i:1:p:87-111
    as

    Download full text from publisher

    File URL: http://thejetas.org/img/70087165.pdf
    File Function: Website of the journal issue
    Download Restriction: no

    References listed on IDEAS

    as
    1. van Aarle, Bas & Lans Bovenberg, A. & Raith, Matthias G., 1997. "Is there a tragedy of a common central bank? A dynamic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 417-447.
    2. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1999. "Does monetary unification lead to excessive debt accumulation?," Journal of Public Economics, Elsevier, vol. 74(3), pages 299-325, December.
    3. Roel Beetsma & Koen Vermeylen, 2007. "The effect of monetary unification on public debt and its real return," Public Choice, Springer, vol. 133(3), pages 393-415, December.
    4. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
    5. Roel Beetsma & Koen Vermeylen, 2007. "The effect of monetary unification on public debt and its real return," Public Choice, Springer, vol. 133(3), pages 393-415, December.
    6. V. V. Chari & Patrick J. Kehoe, 2003. "On the desirability of fiscal constraints in a monetary union," Staff Report 330, Federal Reserve Bank of Minneapolis.
    7. Jerome Creel & Jacques Le Cacheux, 2003. "Inflation divergence and public deficits in a monetary union," Documents de Travail de l'OFCE 2003-05, Observatoire Francais des Conjonctures Economiques (OFCE).
    8. Samir Jahjah, 2000. "Inflation, Debt, and Default in a Monetary Union," IMF Working Papers 00/179, International Monetary Fund.
    9. Bas Aarle & Lans Bovenberg & Matthias Raith, 1995. "Monetary and fiscal policy interaction and government debt stabilization," Journal of Economics, Springer, vol. 62(2), pages 111-140, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kir:journl:v:1:y:2013:i:1:p:87-111. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caner Demir) The email address of this maintainer does not seem to be valid anymore. Please ask Caner Demir to update the entry or send us the correct email address. General contact details of provider: http://edirc.repec.org/data/aakirtr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.