International Debt Overhang and Monetary Policy: A Simulation Exercise Using Czech Republic Data

31 Pages Posted: 31 Jul 2018

See all articles by Charles Goodhart

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

Kanat Isakov

National Research University Higher School of Economics

Mahatelge Udara Peiris

National Research University Higher School of Economics

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall

Date Written: June 18, 2018

Abstract

We are concerned with the dangers arising from excessive international debt overhang, primarily to financial stability in the debtor country. Assuming that debt forgiveness is not possible, a subject which we modelled earlier relating to the Greek debt crisis, (Goodhart et al. (2018)), we show how an independent monetary policy can be used to smooth consumption for both borrowers and lenders. A counter-cyclical monetary policy can contract liquidity when debt growth is high and expand liquidity when default rates are high. These results are closely related to the policy debate on monetary policy as a macroprudential policy tool.

Keywords: Debt, Default, Monetary Policy, Renegotiation, Business Cycles, Open Economy

JEL Classification: F34, G15, G18

Suggested Citation

Goodhart, Charles A.E. and Isakov, Kanat and Peiris, Mahatelge Udara and Tsomocos, Dimitrios P., International Debt Overhang and Monetary Policy: A Simulation Exercise Using Czech Republic Data (June 18, 2018). Saïd Business School WP 2018-14. Available at SSRN: https://ssrn.com/abstract=3223285 or http://dx.doi.org/10.2139/ssrn.3223285

Charles A.E. Goodhart (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

Kanat Isakov

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Mahatelge Udara Peiris

National Research University Higher School of Economics

136, Rodionova street
25/12, Bolshaya pecherskaya street
Nizhniy Novgorod, 603155
Russia

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)

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