Monetary Independence and Rollover Crises

92 Pages Posted: 11 Dec 2018

See all articles by Javier Bianchi

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Jorge Mondragon

University of Minnesota - Minneapolis

Date Written: December 2018

Abstract

This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary independence, lenders anticipate that the government would face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. In a quantitative application, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis during 2011-2012. Finally, we argue that a lender of last resort can go a long way towards reducing the costs of giving up monetary independence.

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Suggested Citation

Bianchi, Javier and Mondragon, Jorge, Monetary Independence and Rollover Crises (December 2018). NBER Working Paper No. w25340, Available at SSRN: https://ssrn.com/abstract=3298812

Javier Bianchi (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Jorge Mondragon

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

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