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Monetary Independence and Rollover Crises

Author

Listed:
  • Javier Bianchi
  • Jorge Mondragon
Abstract
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 independence, lenders anticipate that the government would face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. In a quantitative application, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis during 2011-2012. Finally, we argue that a lender of last resort can go a long way towards reducing the costs of giving up monetary independence.

Suggested Citation

  • Javier Bianchi & Jorge Mondragon, 2018. "Monetary Independence and Rollover Crises," NBER Working Papers 25340, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25340
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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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