Monetary Policy and Debt Fragility / Russell Cooper, Antoine Camous.

Format:

Book

Author/Creator:

Camous, Antoine.

Contributor:

National Bureau of Economic Research.

Cooper, Russell.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20650.

NBER working paper series no. w20650

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

The valuation of government debt is subject to strategic uncertainty, stemming from investors' sentiments. Pessimistic lenders, fearing default, bid down the price of debt. This leaves a government with a higher debt burden, increasing the likelihood of default and thus confirming the pessimism of lenders. This paper studies the interaction of monetary policy and debt fragility. It asks: do monetary interventions mitigate debt fragility? The answer depends in part on the nature of monetary policy, particularly the ability of the monetary authority to commit to future state contingent actions. With 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.

Notes:

Print version record

October 2014.