Monetary Independence and Rollover Crises

Abstract This article shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable rollover crisis. We study sovereign default model with self-fulfilling crises, foreign currency debt, and nominal rigidities. When lacks independence, lenders anticipate would face severe recession in event of liquidity crisis are therefore prone run on bonds. In quantitative application Eurozone debt crisis, we find lack autonomy played central role making Spain Finally, argue lender last resort can go long way toward reducing costs giving up independence.