Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70677
Authors: 
Braun, R. Anton
Nakajima, Tomoyuki
Year of Publication: 
2011
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 2011-13
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

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