The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises

Sovereign debt crises may be driven by either self-fulfilling expectations of default or fundamental fiscal stress. This paper studies the mechanisms by which either conventional or unconventional monetary policy can rule out the former. Conventional monetary policy is modelled as a standard choice of inflation, while unconventional policy as outright purchases in the debt market. By intervening in the sovereign debt market, the central bank effectively swaps risky government paper for monetary liabilities only exposed to inflation risk and thus yielding a lower interest rate. We show that, provided fiscal and monetary authorities share the same objective function, there is a minimum threshold for the size of interventions at which a backstop rules out self-fulfilling default without eliminating the possibility of fundamental default under fiscal stress. Fundamental default risk does not generally undermine the credibility of a backstop, nor does it foreshadow runaway inflation, even when the central bank is held responsible for its own losses

THE MYSTERY OF THE PRINTING PRESS: MONETARY POLICY AND SELF-FULFILLING DEBT CRISES

We study the mechanism by which unconventional (balance-sheet) monetary policy can rule out self-fulfilling sovereign default in a model with optimizing but discretionary fiscal and monetary policymakers. By purchasing sovereign debt, the central bank effectively swaps risky government paper for monetary liabilities only exposed to inflation risk, thus yielding a lower interest rate. We characterize a critical threshold for central bank purchases beyond which, absent fundamental fiscal stress, the government strictly prefers primary surplus adjustment to default. Since default may still occur for fundamental reasons, however, the central bank faces the risk of losses on sovereign debt holdings, which may generate inefficient inflation. This risk does not undermine the credibility of a backstop, nor the ability of a central bank to pursue its inflation objectives when the latter enjoys fiscal backing or fiscal authorities are sufficiently averse to inflation.Giancarlo Corsetti acknowledges the generous support of the Keynes Fellowship at Cambridge University,the Cambridge-Inet Institute at Cambridge, and the Centre For Macroeconomics.This is the author accepted manuscript. It is currently under an indefinite embargo pending publication by Wiley

Exchange Rate Misalignment, Capital Flows, and Optimal Monetary Policy Trade-offs

What determines the optimal monetary trade-offs between internal objectives (inflation, and output gap) and external objectives (competitiveness and trade imbalances) when inefficient capital flows cause exchange rate misalignment and distort current account positions? We characterize this trade-offs analytically, using the workhorse model of modern monetary theory in open economies under incomplete markets�where inefficient capital flows and exchange rate misalignments can arise independently of nominal distortions. We derive a quadratic approximation of the utility-based global policy loss function under fairly general assumptions on preferences and openness, and solve for the optimal targeting rules under cooperation. We show that, in economies with a low degree of exchange rate pass-through, the optimal response to inefficient capital inflows associated with real appreciation is contractionary, above and beyond the natural rate: the optimal policy curbs excessive demand at the cost of exacerbating currency overvaluation. In contrast, a high degree of pass-through, and/or low trade elasticities, warrants expansionary policies that lean against exchange rate appreciation and competitive losses, at the cost of inefficient inflation

Debt Seniority and Sovereign Debt Crises

Is the seniority structure of sovereign debt neutral for a government’s decision between defaulting and raising surpluses? In this paper, we address this question using a model of debt crises where a discretionary government endogenously chooses distortionary taxation and whether to apply an optimal haircut to bondholders. We show that when the size of senior tranches is small, a version of the Modigliani-Miller theorem holds: tranching just redistributes government revenues from junior to senior bondholders, while taxes and government borrowing costs remain unchanged. However, as senior tranches become sufficiently large, default costs on senior debt transpire into a stronger commitment to repay not only the senior tranche, but also the junior one. We show that there is a lower threshold for senior bonds above which tranching can eliminate default on both junior and senior debt, and an upper threshold beyond which the government defaults also on senior debt

Macroeconomic stabilization, monetary-fiscal interactions, and Europe's monetary union

© 2018 Elsevier B.V. The euro area recently experienced a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix

Border Terriers under primary veterinary care in England: demography and disorders

The Border Terrier is a working terrier type that is generally considered to be a relatively healthy and hardy breed. This study aimed to characterise the demography and common disorders of Border Terriers receiving veterinary care in England using de-identified electronic patient record data within the VetCompass™ Programme

Effect of dietary supplementation with ultramicronized palmitoylethanolamide in maintaining remission in cats with nonflea hypersensitivity dermatitis: a double-blind, multicentre, randomized, placebo-controlled study

Background Feline nonflea hypersensitivity dermatitis (NFHD) is a frequent cause of over-grooming, scratching and skin lesions. Multimodal therapy often is necessary. Hypothesis/Objectives To investigate the efficacy of ultramicronized palmitoylethanolamide (PEA-um) in maintaining methylprednisolone-induced remission in NFHD cats. Animals Fifty-seven NFHD cats with nonseasonal pruritus were enrolled originally, of which 25 completed all study requirements to be eligible for analysis. Methods and materials Cats were randomly assigned to PEA-um (15 mg/kg per os, once daily; n = 29) or placebo (n = 28) while receiving a 28 day tapering methylprednisolone course. Cats responding favourably to methylprednisolone were then administered only PEA-um (n = 21) or placebo (n = 23) for another eight weeks, followed by a four week long treatment-free period. Cats were maintained in the study until relapse or study end, whichever came first. Primary outcome was time to relapse. Secondary outcomes were pruritus Visual Analog Scale (pVAS), SCORing Feline Allergic Dermatitis scale (SCORFAD) and owner Global Assessment Score (GAS). Results Mean relapse time was 40.5 days (+/- 7.8 SE) in PEA-um treated cats (n = 13) and 22.2 days (+/- 3.7 SE) for placebo (n = 12; P = 0.04). On Day 28, the severity of pruritus was lower in the PEA-um treated cats compared to placebo (P = 0.03). Mean worsening of pruritus at the final study day was lower in the PEA-um group compared to placebo (P = 0.04), whereas SCORFAD was not different between groups. Mean owner GAS at the final study day was better in the PEA-um than the placebo-treated group (P = 0.05). Conclusion and clinical importance Ultramicronized palmitoylethanolamide could represent an effective and safe option to delay relapse in NFHD cats