Default and Determinacy Under Quantitative Easing

32 Pages Posted: 23 Oct 2019

See all articles by Nikolaos Romanidis

Nikolaos Romanidis

University of Oxford - Said Business School

Dimitrios P. Tsomocos

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

Date Written: October 20, 2019

Abstract

We show that the path of inflation under quantitative easing policies that target interest rates, is determitate in the presence of default. We achieve this through different payoff profiles that a collateralised defaultable bond achieves in different states of nature with distinct default outcomes. In the model, heterogeneous households trade this bond and other shorter maturity risk-free bonds to maximize their intertemporal utility of consumption and labour. The differentiated payoffs of the collateralised bond, in an equilibrium with active default, span the full state space giving determinacy of prices and inflation as an outcome. This, implies that quantitative easing like the one implemented by the ECB in the recent years, can control the stochastic path of inflation.

Keywords: Default, Collateral, Determinacy, Money, Quantitative Easing

Suggested Citation

Romanidis, Nikolaos and Tsomocos, Dimitrios P., Default and Determinacy Under Quantitative Easing (October 20, 2019). Saïd Business School WP 2019-14, Available at SSRN: https://ssrn.com/abstract=3473749 or http://dx.doi.org/10.2139/ssrn.3473749

Nikolaos Romanidis (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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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