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.
- Schlegl, Trebesch, Wright: The Seniority Structure of Sovereign Debt
- Chodorow-Reich, Karabarbounis, Kekre: The Macroeconomics of the Greek Depression
- Ayres, Hevia, Nicolini: Real Exchange Rates and Primary Commodity Prices
- Conesa, Kehoe, Nygaard, Raveendranathan: Implications of Increasing College Attainment for Aging in General Equilibrium
- Nicolini: Karl Brunner’s Contributions to the Theory of the Money Supply
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