Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89261
Authors: 
Bonam, Dennis
Lukkezen, Jasper
Year of Publication: 
2014
Series/Report no.: 
Tinbergen Institute Discussion Paper 14-006/VI
Abstract: 
In standard macroeconomic models, debt sustainability and price level determinacy are achieved when fiscal policy avoids explosive debt and monetary policy controls inflation, irrespective of the relative strengths of each policy stance. We examine how these policy requirements for equilibrium stability and determinacy change in the presence of sovereign risk. An increase in sovereign risk reduces lender's willingness to hold government debt and raises consumption and inflation. Therefore, inflation and debt dynamics are determined jointly. To ensure stable macroeconomic conditions, both the fiscal and monetary stance must shift to offset debt sustainability concerns. We find that the adoption of a deficit target helps alleviate such concerns and raises the scope for macroeconomic stability.
Subjects: 
Fiscal and monetary policy coordination
equilibrium determinacy and stability
sovereign risk
policy rules
JEL: 
E52
E62
E63
Document Type: 
Working Paper

Files in This Item:
File
Size
546.82 kB





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