The Mystery of the Printing Press: Self-Fulfilling Debt Crises and Monetary Sovereignty

45 Pages Posted: 26 Feb 2013

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

University of Cambridge; University of Rome III - Department of Economics; Centre for Economic Policy Research (CEPR)

Luca Dedola

Bank of Italy; European Central Bank (ECB)

Date Written: February 2013


Does monetary sovereignty reduce the likelihood of default conditional on weak fundamentals and/or shield government debt markets from self-fulfilling speculative runs? Building on Calvo (1988), we specify a stochastic monetary economy where discretionary policymakers can default on debt holders through surprise inflation or by imposing discrete haircuts, at the cost of both output and budgetary losses. We show that the resort to the printing press to inflate away nominal debt per se rules out neither fundamental outright default nor confidence crisis. What matters is the ability of the central bank to swap government debt for monetary liabilities (e.g. cash and reserves), whose demand is not undermined by fears of default. The scope for successful central bank interventions in the debt market is however not unconstrained. We characterize conditions that must be met for alternative intervention strategies to be credible, i.e. feasible and welfare improving.

Keywords: Debt monetization, Lender of last resort, Seigniorage, Sovereign risk and default

JEL Classification: E58, E63, H63

Suggested Citation

Corsetti, Giancarlo and Dedola, Luca, The Mystery of the Printing Press: Self-Fulfilling Debt Crises and Monetary Sovereignty (February 2013). CEPR Discussion Paper No. DP9358, Available at SSRN:

Giancarlo Corsetti (Contact Author)

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

via Ostiense 139
Rome, 00154
+39 06 5737 4056 (Phone)
+39 06 5737 4093 (Fax)

Centre for Economic Policy Research (CEPR)

United Kingdom

Luca Dedola

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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