Journal article
Default and determinacy under quantitative easing
- Abstract:
- We show that the path of inflation under quantitative easing policies that target interest rates, is determinate in the presence of default. We achieve this through different payoff profiles that a collateralised defaultable bond achieves in different states of nature with distinct default outcomes. In the model, heterogeneous households trade this bond and other shorter maturity risk-free bonds to maximize their intertemporal utility of consumption and labour. The differentiated payoffs of the collateralised bond, in an equilibrium with active default, span the full state space giving determinacy of prices and inflation as an outcome. This, implies that quantitative easing as implemented by the ECB in the recent years, can control the stochastic path of inflation.
- Publication status:
- Published
- Peer review status:
- Peer reviewed
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(Preview, Version of record, pdf, 296.8KB, Terms of use)
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- Publisher copy:
- 10.1007/s00199-021-01365-6
Authors
- Publisher:
- Springer
- Journal:
- Economic Theory More from this journal
- Volume:
- 74
- Pages:
- 95-111
- Publication date:
- 2021-05-01
- Acceptance date:
- 2021-04-12
- DOI:
- EISSN:
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1432-0479
- ISSN:
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0938-2259
- Language:
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English
- Keywords:
- Pubs id:
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1181470
- Local pid:
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pubs:1181470
- Deposit date:
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2021-06-11
- ARK identifier:
Terms of use
- Copyright holder:
- Romanidis and Tsomocos.
- Copyright date:
- 2021
- Rights statement:
- © The Author(s) 2021. Open Access: This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.
- Licence:
- CC Attribution (CC BY)
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