Crunch Time: Fiscal Crises and the Role of Monetary Policy / David Greenlaw, James D. Hamilton, Peter Hooper, Frederic S. Mishkin.

Format:

Book

Author/Creator:

Greenlaw, David.

Contributor:

National Bureau of Economic Research.

Hamilton, James D.

Hooper, Peter.

Mishkin, Frederic S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19297.

NBER working paper series no. w19297

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Crunch Time

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe. We analyze the recent experience of advanced economies using both econometric methods and case studies and conclude that countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics. Such feedback is left out of current long-term U.S. budget projections and could make it much more difficult for the U.S. to maintain a sustainable budget course. A potential fiscal crunch also puts fundamental limits on what monetary policy is able to achieve. In simulations of the Federal Reserve's balance sheet, we find that under our baseline assumptions, in 2017-18 the Fed will be running sizable income losses on its portfolio net of operating and other expenses and therefore for a time will be unable to make remittances to the U.S. Treasury. Under alternative scenarios that allow for an emergence of fiscal concerns, the Fed's net losses would be more substantial.

Notes:

Print version record

August 2013.