Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/70677 
Year of Publication: 
2011
Series/Report no.: 
Working Paper No. 2011-13
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
We compare the dynamics of inflation and bond yields leading up to a sovereign debt crisis in settings where asset markets are frictionless to other settings with financial frictions. As compared with the case with frictionless asset markets, an asset market structure with financial frictions generates a significant delay in the response of prices to news about a future debt crisis. With complete markets, prices jump in response to news about the possibility of a future debt crisis. However, when short selling of government bonds is restricted, some agents can't act on their beliefs, and prices don't respond to the news. Instead, prices only move in periods immediately prior the crisis.
Subjects: 
sovereign debt crisis
deflation
fiscal risk
leverage
borrowing constraint
JEL: 
E31
E62
H60
Document Type: 
Working Paper

Files in This Item:
File
Size
886.44 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.