Sovereign default in a monetary union

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  • dc.contributor.author De Ferra, Sergioca
  • dc.contributor.author Romei, Federicaca
  • dc.date.accessioned 2018-09-26T15:54:26Z
  • dc.date.available 2018-09-26T15:54:26Z
  • dc.date.issued 2018-05
  • dc.description.abstract In the aftermath of the global financial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates.ca
  • dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
  • dc.format.mimetype application/pdfca
  • dc.identifier.uri http://hdl.handle.net/10230/35506
  • dc.language.iso engca
  • dc.relation.ispartofseries ADEMU Working Paper Series;118
  • dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
  • dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.ca
  • dc.rights.accessRights info:eu-repo/semantics/openAccessca
  • dc.rights.uri https://creativecommons.org/licenses/by/4.0/ca
  • dc.title Sovereign default in a monetary unionca
  • dc.type info:eu-repo/semantics/workingPaperca

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