Monetary Independence and Rollover Crises

Javier Bianchi, Jorge Mondragon

NBER Working Paper No. 25340
Issued in December 2018, Revised in September 2019
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics

This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary independence, lenders anticipate that the government would face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. In a quantitative application, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis during 2011-2012. Finally, we argue that a lender of last resort can go a long way towards reducing the costs of giving up monetary independence.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25340