Inflation, Debt, and Default in a Monetary Union
30 Pages Posted: 3 Feb 2006
Date Written: November 2000
Depending on the preferences of the central bank, countries in a monetary union tend to accumulate less debt. This reduces the need for fiscal criteria such as debt ceilings. In a monetary union with an independent central bank and a sufficiently large number of relatively small members, investors will begin rationing credit to the government more rapidly, and an equilibrium with no inflation and no default exists. However, highly-indebted countries are more likely to default once they join a monetary union.
Keywords: Public debt monetary policy inflation monetary union default
JEL Classification: E43 E52 E58 F33 G15 H60 H63
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