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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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    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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