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Speculative Attacks within or outside a Monetary Union: Default versus Inflation (what to do today). CEPS Policy Brief No. 257, November 2011

Gros, Daniel (2011) Speculative Attacks within or outside a Monetary Union: Default versus Inflation (what to do today). CEPS Policy Brief No. 257, November 2011. [Policy Paper]

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    Abstract

    In this analytical policy brief, CEPS Director Daniel Gros explores whether there is a fundamental difference between a formal sovereign default with a haircut and debt monetisation, which reduces the purchasing power for investors by the same amount. He argues that there is indeed a difference because a formal sovereign default invariably leads to a banking crisis. Moreover, within a monetary union a sovereign is more exposed to liquidity problems than a country with an independent currency and any of its problems quickly spill over into the banking system, which cannot survive without a reliable source of liquidity given that banks are by nature highly leveraged institutions. In terms of policy prescriptions, one conclusion is that less effort and financing should be devoted to trying to lower yields on peripheral government debt, but a lender of last resort is needed for both sovereigns and the banks. Another policy priority should be to stabilise the banking system in such a way that it can survive even if government debt yields increase.

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    Item Type: Policy Paper
    Subjects for non-EU documents: Countries > Italy
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Policy Briefs
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 17 Nov 2011 08:25
    Number of Pages: 10
    Last Modified: 17 Nov 2011 08:25
    URI: http://aei.pitt.edu/id/eprint/32975

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