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Monetary Independence and Rollover Crises

Working Paper 755 | Published May 26, 2021

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Javier Bianchi Monetary Advisor
Jorge Mondragon Research Analyst
Monetary Independence and Rollover Crises


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 to the Eurozone debt crisis, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis. Finally, we argue that a lender of last resort can go a long way towards reducing the costs of giving up monetary independence.

Published in: _Quarterly Journal of Economics_ (Vol. 137, Iss. 1, February 2022, pp. 435-491),