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Monetary Independence and Rollover Crises

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  • Javier Bianchi
  • Jorge Mondragon

Abstract

This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence.

Suggested Citation

  • Javier Bianchi & Jorge Mondragon, 2018. "Monetary Independence and Rollover Crises," Working Papers 755, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmwp:755
    DOI: 10.21034/wp.755
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    References listed on IDEAS

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    Cited by:

    1. Michal Szkup, . "Preventing Self-Fulfilling Debt Crises: A Global Games Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    2. Cristina Arellano & Gabriel Mihalache & Yan Bai, 2018. "Inflation Targeting with Sovereign Default Risk," 2018 Meeting Papers 851, Society for Economic Dynamics.
    3. Sewon Hur & Illenin O. Kondo & Fabrizio Perri, 2018. "Real Interest Rates, Inflation, and Default," Staff Report 574, Federal Reserve Bank of Minneapolis.
    4. Wenxin Du & Carolin E. Pflueger & Jesse Schreger, 2020. "Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy," Journal of Finance, American Finance Association, vol. 75(6), pages 3097-3138, December.
    5. Javier Bianchi & Pablo Ottonello & Ignacio Presno, 2019. "Fiscal Stimulus under Sovereign Risk," Working Papers 762, Federal Reserve Bank of Minneapolis.
    6. Javier Bianchi & Cesar Sosa-Padilla, 2018. "Reserve Accumulation, Macroeconomic Stabilization and Sovereign Risk," 2018 Meeting Papers 1166, Society for Economic Dynamics.
    7. Benjamin Born & Gernot Müller & Johannes Pfeifer & Susanne Wellmann, 2020. "Different No More: Country Spreads in Advanced and Emerging Economies," CESifo Working Paper Series 8083, CESifo.
    8. Ioannis N. Kallianiotis & Iordanis Petsas, 2020. "The Effectiveness of the Single Mandate of the ECB and the Dual of the Fed," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(4), pages 1-11.
    9. Wolf, Martin, 2020. "Pecuniary externalities in economies with downward wage rigidity," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 219-235.
    10. Corsetti, Giancarlo & Maeng, Seung Hyun, 2020. "Debt Crises, Fast and Slow," CEPR Discussion Papers 14868, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Sovereign debt crises; Rollover risk; Monetary unions;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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