New Key Publication in the ‘IMF Economic Review’
The IMF Economic Review published the article ‘Sovereign Default and the Stability of Inflation-Targeting Regimes’ authored by TI fellow Sweder van Wijnbergen and Andreas Schabert (University of Cologne, Germany).
Abstract
‘We analyze the impact of interactions between monetary and fiscal policy on macroeconomic stability. We find that in the presence of sovereign default, macroeconomic stability requires monetary policy to be passive if the feedback from debt surprises back to the primary surplus is too weak. An active monetary policy can however only contribute to the stabilization inflation and output, if the primary surplus is increasing in debt with a slope that increases with the default probability. The results are relevant for the design of fiscal and monetary policy in emerging markets where sovereign credibility is not well established. Recent debt developments in Western Europe and in the United States suggest these results may become relevant for more mature financial markets too once the current low inflation period is over.’
Please click here to view the article.
Article citation: IMF Economic Review (2014) 62, 261–287. doi:10.1057/imfer.2014.8; published online 1 July 2014