Sovereign Debt Booms in Monetary Unions
- (pp. 101-06)
AbstractWe propose a continuous time model to investigate the impact of inflation credibility on sovereign debt dynamics. At every point in time, an impatient government decides fiscal surplus and inflation, without commitment. Inflation is costly, but reduces the real value of outstanding nominal debt. In equilibrium, debt dynamics is the result of two opposing forces: (i) impatience and (ii) the desire to conquer low inflation. A large increase in inflation credibility can trigger a process of debt accumulation. This rationalizes the sovereign debt booms that are often experienced by low inflation credibility countries upon joining a currency union.
Citation2014. "Sovereign Debt Booms in Monetary Unions." American Economic Review, 104 (5): 101-06. DOI: 10.1257/aer.104.5.101
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- F33 International Monetary Arrangements and Institutions
- H63 National Debt; Debt Management; Sovereign Debt