Erratum to "Sovereign risk matters: Endogenous default risk and the time-varying volatility of interest rate spreads" [Journal of International Economics 134 (2020) 103542]
In: Journal of international economics, Band 137, S. 103611
ISSN: 0022-1996
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In: Journal of international economics, Band 137, S. 103611
ISSN: 0022-1996
In: Journal of international economics, Band 134, S. 103542
ISSN: 0022-1996
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Working paper
In: FEDS Notes No. 2020-09-21 https://doi.org/10.17016/2380-7172.2600
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Working paper
In: FRB International Finance Discussion Paper No. 1275
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In the aftermath of the global financial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates. ; The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
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In: CEPR Discussion Paper No. DP12976
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Working paper
In: Journal of international economics, Band 124, S. 103303
ISSN: 0022-1996
In: NBER Working Paper No. w26402
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Working paper