Inflation, Debt, and Default in a Monetary Union
November 1, 2000
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Summary
Depending on the preferences of the central bank, countries in a monetary union tend to accumulate less debt. This reduces the need for fiscal criteria such as debt ceilings. In a monetary union with an independent central bank and a sufficiently large number of relatively small members, investors will begin rationing credit to the government more rapidly, and an equilibrium with no inflation and no default exists. However, highly-indebted countries are more likely to default once they join a monetary union.
Subject: Banking, Bonds, Debt service, Economic integration, External debt, Financial institutions, Inflation, Monetary unions, Price stabilization, Prices
Keywords: Bonds, budget constraint, Debt service, default, government credit, government default, government set, inflation, loss function, monetary policy, monetary union, Monetary unions, Price stabilization, Public debt, regime switch, WP
Pages:
30
Volume:
2000
DOI:
Issue:
179
Series:
Working Paper No. 2000/179
Stock No:
WPIEA1792000
ISBN:
9781451859027
ISSN:
1018-5941
