'Whatever it takes' is all you need : monetary policy and debt fragility
American economic journal-macroeconomics, 2019, Vol. 11, No. 4, pp. 38-81
CAMOUS, Antoine, COOPER, Russell, 'Whatever it takes' is all you need : monetary policy and debt fragility, American economic journal-macroeconomics, 2019, Vol. 11, No. 4, pp. 38-81 - http://hdl.handle.net/1814/66018
Retrieved from Cadmus, EUI Research Repository
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, 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.
Available in October 2019
Cadmus permanent link: http://hdl.handle.net/1814/66018
Full-text via DOI: 10.1257/mac.20170167
ISSN: 1945-7707; 1945-7715
Publisher: Amer Economic Assoc
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