Self-fulfilling debt crises: What can monetary policy do?

Bacchetta, Philippe; Perazzi, Elena; Wincoop, Eric van

doi:10.1016/j.jinteco.2017.11.004

Cited by 23 publications

(11 citation statements)

References 21 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Thus, by trying to protect itself, the central bank could end up being more exposed to the periphery. In fact, the announcement of the Outright Monetary Transaction (Draghi ) can be seen the exact opposite strategy: by announcing that it was willing to be more exposed to the periphery, the central bank triggered a shift in sentiment that would lead fragmentation to recede and thus the exposure of the central bank to the periphery to decrease (Bacchetta, Perazzi, and van Wincoop ). Other policy options are available.…”

Section: Policy Implicationsmentioning

confidence: 99%

“…This has been particularly the case of the Eurosystem (Financial Times 2010) and Trichet (2011b). periphery, the central bank triggered a shift in sentiment that would lead fragmentation to recede and thus the exposure of the central bank to the periphery to decrease (Bacchetta, Perazzi, and van Wincoop 2018). Other policy options are available.…”

Section: Policy Implicationsmentioning

confidence: 99%

See 1 more Smart Citation

Monetary Policy Transmission with Interbank Market Fragmentation

Vari¹

2019

J of Money Credit Banking

View full text Add to dashboard Cite

This paper shows how interbank market fragmentation disrupts the transmission of monetary policy. Fragmentation is the fact that banks, depending on their country of location, have different probabilities of default on their interbank borrowings. Once fragmentation is introduced into standard theoretical models of monetary policy implementation, excess liquidity arises endogenously. This leads short‐term interest rates to depart from the central bank policy rates. Using data on monetary policy operations, I show that this mechanism has been at work in the euro area since 2008. The model is used to analyze conventional and unconventional monetary policy measures.

show abstract

Section: Policy Implicationsmentioning

confidence: 99%

Section: Policy Implicationsmentioning

confidence: 99%

Monetary Policy Transmission with Interbank Market Fragmentation

Vari¹

2019

J of Money Credit Banking

View full text Add to dashboard Cite

show abstract

“…For example, the only objective for the Monetary Policy Committee of the Central Bank of Brazil is the achievement of the inflation targets set by the National Monetary Council. 6 Concerning the multiplicity of equilibria and the role inflation can play in selecting among them, Corsetti and Dedola (2016) focus on unconventional monetary policy whereas Bacchetta et al (2018) analyze how interest rate rules can be used to prevent the self-fulfilling crises in the environment of Lorenzoni and Werning (2019).…”

Section: Modelmentioning

confidence: 99%

Monetary Policy and Sovereign Risk in Emerging Economies (NK Default)

Arellano

Bai²,

Mihalache³

2020

Preprint

View full text Add to dashboard Cite

This paper develops a New Keynesian model with sovereign default risk (NK-Default). We focus on the interaction between monetary policy, conducted according to an interest rate rule that targets inflation, and external defaultable debt issued by the government. Monetary policy and default risk interact since both affect domestic consumption, production, and inflation. We find that default risk amplifies monetary frictions and generates a tension for monetary policy, which increases the volatility of inflation and nominal rates. These monetary frictions in turn discipline sovereign borrowing, slowing down debt accumulation and lowering sovereign spreads. Our framework replicates the positive comovements of spreads with nominal domestic rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and spreads.

show abstract

“…These papers argue that the monetary base can be useful in managing government debt. Bacchetta, Perazzi, and van Wincoop () examine the potential for monetary policy to avoid self‐fulfilling sovereign debt crises. Authors’ combine a version of the slow‐moving debt crisis model in a standard New Keynesian model.…”

Section: Literature Reviewmentioning

confidence: 99%

Monetary base and federal government debt in the long‐run: A non‐linear analysis

Ahmed

2019

Bulletin of Econ Res

View full text Add to dashboard Cite

Government bonds are usually traded between the financial institutions and the Fed during the open market operations. These operations impact the bank reserves, subsequently influencing the monetary base. The monetary base and government bonds may portray a common trend and government debt could potentially bind the central bank to debt monetization. This paper, using monthly data on federal government debt and the monetary base from 1947:1 to 2018:10, investigates the presence of a long-run equilibrium relationship between the two variables and as to how the long-run equilibrium relationship vary in the short-run. Threshold cointegration tests find evidence of a long-run equilibrium relationship. Estimates of the threshold vector error-correction model find statistically significant evidence of contraction in the monetary base growth in the short-run in regime 1. In regime 2, the growth in the monetary base does not adjust to accommodate faster government debt growth. These estimates find no evidence of debt monetization or otherwise in either of the regimes in the United States. The Fed, by reducing the monetary base, perhaps focuses more on the inflation target. The findings also suggest a potential scenario where the Fed and the fiscal authority are not conjoined with each other in their operations.

show abstract

Self-fulfilling debt crises: What can monetary policy do?

Cited by 23 publications

References 21 publications

Monetary Policy Transmission with Interbank Market Fragmentation

Monetary Policy Transmission with Interbank Market Fragmentation

Monetary Policy and Sovereign Risk in Emerging Economies (NK Default)

Monetary base and federal government debt in the long‐run: A non‐linear analysis

Contact Info

Product

Resources

About