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"Whatever it takes" is all you need: monetary policy and debt fragility

Author

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  • Russell Cooper

    (Pennsylvania State University)

  • Antoine Camous

    (University of Mannheim)

Abstract

The valuation of government debt is subject to strategic uncertainty. Pessimistic lenders, fearing default, bid down the price of debt, leaving a government with a higher debt burden. This increases the likelihood of default and thus confirming the pessimism of lenders. Can monetary interventions mitigate debt fragility? With one-period commitment to a state contingent policy, the monetary authority can indeed overcome strategic uncertainty. Under discretion, debt fragility remains unless reputation effects are sufficiently strong. Simpler forms of interventions, such as an inflation target, cannot eliminate debt fragility

Suggested Citation

  • Russell Cooper & Antoine Camous, 2016. ""Whatever it takes" is all you need: monetary policy and debt fragility," 2016 Meeting Papers 863, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:863
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    References listed on IDEAS

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