Arbeitspapier

Sovereign Default and the Stability of Inflation Targeting Regimes

We analyse the impact of interactions between monetary and fiscal policy on macroeconomic stability. We find that in the presence of sovereign default beliefs a monetary policy, which aims to stabilize inflation through an active interest rate policy, will destabilize the economy if the feedback from debt surprises back to the primary surplus is too weak. This result, which relies on endogenous changes in the default premium, is at odds with the results in an environment without default risk, where an active monetarypolicy guarantees macroeconomic stability. The results are highly relevant for the design of fiscal and monetary policy in emerging markets where sovereign credibility is not well established. Recent debt developments in Western Europe and in the US suggest these results might become relevant for more mature financial markets too.

Sprache
Englisch

Erschienen in
Series: Tinbergen Institute Discussion Paper ; No. 11-064/2/ DSF20

Klassifikation
Wirtschaft
Monetary Policy
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Open Economy Macroeconomics
Thema
Inflation targeting
fiscal-monetary policy interactions
sovereign default risk
foreign debt

Ereignis
Geistige Schöpfung
(wer)
Schabert, Andreas
van Wijnbergen, Sweder J.G.
Ereignis
Veröffentlichung
(wer)
Tinbergen Institute
(wo)
Amsterdam and Rotterdam
(wann)
2011

Handle
Letzte Aktualisierung
10.03.2025, 11:44 MEZ

Datenpartner

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Objekttyp

  • Arbeitspapier

Beteiligte

  • Schabert, Andreas
  • van Wijnbergen, Sweder J.G.
  • Tinbergen Institute

Entstanden

  • 2011

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