Inflation, Debt, and Default in a Monetary Union
30 Pages Posted: 11 Aug 2009
Date Written: November 2000
Depending on the preferences of the central bank, countries in a monetary union tend to accumulate less debt. This reduces the need for fiscal criteria such as debt ceilings. In a monetary union with an independent central bank and a sufficiently large number of relatively small members, investors will begin rationing credit to the government more rapidly, and an equilibrium with no inflation and default exists. However, highly indebted countries are more likely to default once they join a monetary union.
Keywords: Debt, Inflation, Monetary unions, Economic models
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