Is it is or is it Ain't My Obligation? Regional Debt in Monetary Unions

25 Pages Posted: 28 Jan 2004 Last revised: 25 Jun 2010

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Hubert Kempf

Ecole Normale Superieure de Cachan (ENS)

Dan Peled

University of Haifa - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2004

Abstract

This paper studies the implications of the circulation of interest bearing regional debt in a monetary union. Does the circulation of this debt have the same monetary implications as the printing of money by a central government? Or are the obligations of this debt simply backed by future taxation with no inflationary consequences? We argue here that both outcomes can arise in equilibrium. In the model economy we consider there are multiple equilibria which reflect the perceptions of agents regarding the manner in which the debt obligations will be met. In one equilibrium, termed Ricardian, the future obligations are met with taxation by a regional government while in the other, termed Monetization, the central bank is induced to print money to finance the region's obligations. The multiplicity of equilibria reflects a commitment problem of the central bank. A key indicator of the selected equilibrium is the distribution of the holdings of the regional debt. We use the model to assess the impact of policy measures, such as fiscal restrictions, within a monetary union.

Suggested Citation

Cooper, Russell W. and Kempf, Hubert and Peled, Dan, Is it is or is it Ain't My Obligation? Regional Debt in Monetary Unions (January 2004). NBER Working Paper No. w10239. Available at SSRN: https://ssrn.com/abstract=492352

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hubert Kempf

Ecole Normale Superieure de Cachan (ENS) ( email )

61 avenue du président Wilson
Cachan, Paris 94235
France

Dan Peled

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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