Monetary Policy Under a Fiscal Theory of Sovereign Default

Tinbergen Institute Discussion Paper 09-093/2

16 Pages Posted: 10 Nov 2009

See all articles by Andreas Schabert

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Date Written: October 2009

Abstract

This paper examines equilibrium determination under different monetary policy regimes when the government might default on its debt. We apply a cash-in-advance model where the government does not have access to non-distortionary taxation and does not account for initial outstanding debt when it sets the income tax rate. Solvency is then not guaranteed and sovereign default can affect the return on public debt. If the central bank sets the interest rate in a conventional way, the equilibrium allocation cannot be determined. If, instead, money supply is controlled, the equilibrium allocation can uniquely be determined.

Keywords: equilibrium determination, interest rate policy, money supply, public debt, sovereign default

JEL Classification: E31, E52, E63

Suggested Citation

Schabert, Andreas, Monetary Policy Under a Fiscal Theory of Sovereign Default (October 2009). Tinbergen Institute Discussion Paper 09-093/2. Available at SSRN: https://ssrn.com/abstract=1502589 or http://dx.doi.org/10.2139/ssrn.1502589

Andreas Schabert (Contact Author)

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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