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The role of dispersed information in maintaining low interest rates

Author

Listed:
  • Marco Bassetto

    (Institute for Fiscal Studies)

  • Carlo Galli

    (Institute for Fiscal Studies)

  • Jason Hall

    (University of Minnesota)

Abstract

When public debt is issued in domestic currency, any sudden confidence crisis in the repayment ability of the government need not trigger a default, since it can be accommodated by temporary monetary financing, converting default risk into inflation risk. When the default risk premium is determined by well-informed financial intermediaries while inflation arises from the choices of less-informed workers and producers, this conversion masks adverse news, at least temporarily, and results in lower interest rates following adverse shocks. In this paper, we assess the importance of this channel, and the extent to which it is eroded when persistent fiscal shortfalls shift the prior held by all agents in the economy about the eventual resolution of the imbalance.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Marco Bassetto & Carlo Galli & Jason Hall, 2025. "The role of dispersed information in maintaining low interest rates," IFS Working Papers W25/62, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:25/62
    as

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    References listed on IDEAS

    as
    1. Ricardo Reis, 2020. "The People versus the Markets: A Parsimonious Model of Inflation Expectations," Discussion Papers 2033, Centre for Macroeconomics (CFM).
    2. Laura L. Veldkamp, 2011. "Information Choice in Macroeconomics and Finance," Economics Books, Princeton University Press, edition 1, number 9621, December.
    3. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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