As part of the Vilfredo Pareto Research Seminar series, the International Economics Department at the Graduate Institute is pleased to invite you to the public talk Sovereign default in a monetary union (joint work with Sergio de Ferra) given by Federica Romei, Professor of Economics at Stockholm School of Economics.

Federica Romei holds a PhD from LUISS Guido Carli and was a Max Weber and Jean Monnet Fellow at the European University Institute. She is currently Assistant Professor at Stockholm School of Economics and a Research Affiliate at CEPR (MEF, IMF). Her research focuses on monetary economics and international macroeconomics and fiscal policy.

Abstract: After the global financial crisis, sovereign default risk and nominal interest rates close to the zero lower bound have characterized fiscal and monetary policy in the euro area. This paper investigates the interaction between sovereign default and the conduct of monetary policy, when debtors can act strategically and they share a single currency with their lenders. We address this question in a model of a monetary union composed of heterogeneous countries, where the monetary authority may be constrained by the zero lower bound and where sovereign default is endogenous.We uncover three main results. First, default is deflationary and it induces an expansionary response of the monetary authority. This response benefits debtors, who thus have a stronger incentive to default. Second, the zero lower bound limits the ability of the monetary authority to respond to default, and thus it strengthens debtors’ incentive to repay external debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance.These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates.