Debt overhang and monetary policy in Czech Republic
We investigate the consequences of excessive international debt overhang as they relate to both debtor and creditor countries. In particular, we assess the impact of monetary policy on financial stability and how it can be used to smooth borrowers, as well as creditors, consumption over the business...
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| Format: | Journal article |
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Higher School of Economics
2018
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| _version_ | 1826263307145707520 |
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| author | Goodhart, C Tsomocos, D Isakov, K Peiris, M |
| author_facet | Goodhart, C Tsomocos, D Isakov, K Peiris, M |
| author_sort | Goodhart, C |
| collection | OXFORD |
| description | We investigate the consequences of excessive international debt overhang as they relate to both debtor and creditor countries. In particular, we assess the impact of monetary policy on financial stability and how it can be used to smooth borrowers, as well as creditors, consumption over the business cycle. Based on [Goodhart, Peiris and Tsomocos, 2018], we establish that an independent countercyclical monetary policy, that contracts liquidity whenever debt grows whereas it expands it when default rises, reduces volatility of consumption. In effect, monetary policy provides an extra degree of freedom to the policymaker. We implement our approach to the Czech and Eurozone area economies during the 1990s. In our model, we introduce endogenous default ά la [Shubik and Wilson, 1977], whereby debtors incur a welfare cost in renegotiating their contractual debt obligations that is commensurate to the level of default. However, this cost depends explicitly on the business cycle and it should be countercyclical. Hence, contractionary monetary policy reduces the volume of trade and efficiency, thus increasing default. This occurs as the default cost increases the associated default accelerator channel engenders higher default rates. On the other hand, lower interest rates increase trade efficiency and, consequently, reduce the amplitude of the business cycle and benefit financial stability. In sum, the appropriate design of monetary policy complements financial stability policy. The modelling of endogenous default allows us to study the interaction of monetary and macroprudential policy. |
| first_indexed | 2024-03-06T19:49:40Z |
| format | Journal article |
| id | oxford-uuid:23895466-6722-4903-886f-41da3492067c |
| institution | University of Oxford |
| last_indexed | 2024-03-06T19:49:40Z |
| publishDate | 2018 |
| publisher | Higher School of Economics |
| record_format | dspace |
| spelling | oxford-uuid:23895466-6722-4903-886f-41da3492067c2022-03-26T11:44:49ZDebt overhang and monetary policy in Czech RepublicJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:23895466-6722-4903-886f-41da3492067cSymplectic Elements at OxfordHigher School of Economics2018Goodhart, CTsomocos, DIsakov, KPeiris, MWe investigate the consequences of excessive international debt overhang as they relate to both debtor and creditor countries. In particular, we assess the impact of monetary policy on financial stability and how it can be used to smooth borrowers, as well as creditors, consumption over the business cycle. Based on [Goodhart, Peiris and Tsomocos, 2018], we establish that an independent countercyclical monetary policy, that contracts liquidity whenever debt grows whereas it expands it when default rises, reduces volatility of consumption. In effect, monetary policy provides an extra degree of freedom to the policymaker. We implement our approach to the Czech and Eurozone area economies during the 1990s. In our model, we introduce endogenous default ά la [Shubik and Wilson, 1977], whereby debtors incur a welfare cost in renegotiating their contractual debt obligations that is commensurate to the level of default. However, this cost depends explicitly on the business cycle and it should be countercyclical. Hence, contractionary monetary policy reduces the volume of trade and efficiency, thus increasing default. This occurs as the default cost increases the associated default accelerator channel engenders higher default rates. On the other hand, lower interest rates increase trade efficiency and, consequently, reduce the amplitude of the business cycle and benefit financial stability. In sum, the appropriate design of monetary policy complements financial stability policy. The modelling of endogenous default allows us to study the interaction of monetary and macroprudential policy. |
| spellingShingle | Goodhart, C Tsomocos, D Isakov, K Peiris, M Debt overhang and monetary policy in Czech Republic |
| title | Debt overhang and monetary policy in Czech Republic |
| title_full | Debt overhang and monetary policy in Czech Republic |
| title_fullStr | Debt overhang and monetary policy in Czech Republic |
| title_full_unstemmed | Debt overhang and monetary policy in Czech Republic |
| title_short | Debt overhang and monetary policy in Czech Republic |
| title_sort | debt overhang and monetary policy in czech republic |
| work_keys_str_mv | AT goodhartc debtoverhangandmonetarypolicyinczechrepublic AT tsomocosd debtoverhangandmonetarypolicyinczechrepublic AT isakovk debtoverhangandmonetarypolicyinczechrepublic AT peirism debtoverhangandmonetarypolicyinczechrepublic |