On a lender of last resort with a central bank and a stability fund

We explore the complementarity between a central bank and a financial stability Fund in stabilizing sovereign debt markets. The central bank pursuing its mandate can intervene with public sector purchasing programs, buying sovereign debt in the secondary market, provided that the debt is safe. The s...

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Autores: Callegari, Giovanni, Marimon, Ramon, Wicht, Adrien, Zavalloni, Luca
Tipo de recurso: artículo
Estado:Versión publicada
Fecha de publicación:2023
País:España
Institución:Varias* (Consorci de Biblioteques Universitáries de Catalunya, Centre de Serveis Científics i Acadèmics de Catalunya)
Repositorio:Recercat. Dipósit de la Recerca de Catalunya
OAI Identifier:oai:recercat.cat:10230/59232
Acceso en línea:http://hdl.handle.net/10230/59232
http://dx.doi.org/10.1016/j.red.2023.07.012
Access Level:acceso abierto
Palabra clave:Recursive contracts
Limited enforcement
Debt
Self-fulfilling beliefs
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spelling On a lender of last resort with a central bank and a stability fundCallegari, GiovanniMarimon, RamonWicht, AdrienZavalloni, LucaRecursive contractsLimited enforcementDebtSelf-fulfilling beliefsWe explore the complementarity between a central bank and a financial stability Fund in stabilizing sovereign debt markets. The central bank pursuing its mandate can intervene with public sector purchasing programs, buying sovereign debt in the secondary market, provided that the debt is safe. The sovereign sells its debt to private lenders, through market auctions. Furthermore, it has access to a long-term state-contingent contract with a Fund: a country-specific debt-and-insurance contract that accounts for no-default and no-over-lending constraints. The Fund needs to guarantee gross-financial-needs and no-over-lending. We show that these constraints endogenously determine the ‘optimal debt maturity’ structure that minimizes the Required Fund Capacity (RFC) to make all sovereign debt safe. However, the Fund may have limited absorption capacity and fall short of its RFC. The central bank may be able to cover the difference, in which case there is perfect complementarity and the joint institutions act as an effective ‘lender of last resort’. We calibrate our model to the Italian economy and find that with a Fund contract its ‘optimal debt maturity’ is 2.9 years with an RFC of 90% of GDP, which is above what the European Stability Mechanism (ESM) could reasonably absorb, but may be feasible with an ECB Transmission Protection Instrument (TPI) intervention. In contrast, the average maturity of Italian sovereign debt has been circa 6.2 years, with a needed absorption capacity of around 105% of GDP, which may call for a maturity restructuring to ease the activation of TPI.Elsevier202420242023info:eu-repo/semantics/articleinfo:eu-repo/semantics/publishedVersionapplication/pdfapplication/pdfhttp://hdl.handle.net/10230/59232http://dx.doi.org/10.1016/j.red.2023.07.012reponame:Recercat. Dipósit de la Recerca de Catalunyainstname:Varias* (Consorci de Biblioteques Universitáries de Catalunya, Centre de Serveis Científics i Acadèmics de Catalunya)InglésReview of Economic Dynamics. 2023;50:106-30.© 2023 The Author(s). Published by Elsevier Inc. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).https://creativecommons.org/licenses/by-nc-nd/4.0/info:eu-repo/semantics/openAccessoai:recercat.cat:10230/592322026-05-29T05:05:01Z
dc.title.none.fl_str_mv On a lender of last resort with a central bank and a stability fund
title On a lender of last resort with a central bank and a stability fund
spellingShingle On a lender of last resort with a central bank and a stability fund
Callegari, Giovanni
Recursive contracts
Limited enforcement
Debt
Self-fulfilling beliefs
title_short On a lender of last resort with a central bank and a stability fund
title_full On a lender of last resort with a central bank and a stability fund
title_fullStr On a lender of last resort with a central bank and a stability fund
title_full_unstemmed On a lender of last resort with a central bank and a stability fund
title_sort On a lender of last resort with a central bank and a stability fund
dc.creator.none.fl_str_mv Callegari, Giovanni
Marimon, Ramon
Wicht, Adrien
Zavalloni, Luca
author Callegari, Giovanni
author_facet Callegari, Giovanni
Marimon, Ramon
Wicht, Adrien
Zavalloni, Luca
author_role author
author2 Marimon, Ramon
Wicht, Adrien
Zavalloni, Luca
author2_role author
author
author
dc.subject.none.fl_str_mv Recursive contracts
Limited enforcement
Debt
Self-fulfilling beliefs
topic Recursive contracts
Limited enforcement
Debt
Self-fulfilling beliefs
description We explore the complementarity between a central bank and a financial stability Fund in stabilizing sovereign debt markets. The central bank pursuing its mandate can intervene with public sector purchasing programs, buying sovereign debt in the secondary market, provided that the debt is safe. The sovereign sells its debt to private lenders, through market auctions. Furthermore, it has access to a long-term state-contingent contract with a Fund: a country-specific debt-and-insurance contract that accounts for no-default and no-over-lending constraints. The Fund needs to guarantee gross-financial-needs and no-over-lending. We show that these constraints endogenously determine the ‘optimal debt maturity’ structure that minimizes the Required Fund Capacity (RFC) to make all sovereign debt safe. However, the Fund may have limited absorption capacity and fall short of its RFC. The central bank may be able to cover the difference, in which case there is perfect complementarity and the joint institutions act as an effective ‘lender of last resort’. We calibrate our model to the Italian economy and find that with a Fund contract its ‘optimal debt maturity’ is 2.9 years with an RFC of 90% of GDP, which is above what the European Stability Mechanism (ESM) could reasonably absorb, but may be feasible with an ECB Transmission Protection Instrument (TPI) intervention. In contrast, the average maturity of Italian sovereign debt has been circa 6.2 years, with a needed absorption capacity of around 105% of GDP, which may call for a maturity restructuring to ease the activation of TPI.
publishDate 2023
dc.date.none.fl_str_mv 2023
2024
2024
dc.type.none.fl_str_mv info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
format article
status_str publishedVersion
dc.identifier.none.fl_str_mv http://hdl.handle.net/10230/59232
http://dx.doi.org/10.1016/j.red.2023.07.012
url http://hdl.handle.net/10230/59232
http://dx.doi.org/10.1016/j.red.2023.07.012
dc.language.none.fl_str_mv Inglés
language_invalid_str_mv Inglés
dc.relation.none.fl_str_mv Review of Economic Dynamics. 2023;50:106-30.
dc.rights.none.fl_str_mv https://creativecommons.org/licenses/by-nc-nd/4.0/
info:eu-repo/semantics/openAccess
rights_invalid_str_mv https://creativecommons.org/licenses/by-nc-nd/4.0/
eu_rights_str_mv openAccess
dc.format.none.fl_str_mv application/pdf
application/pdf
dc.publisher.none.fl_str_mv Elsevier
publisher.none.fl_str_mv Elsevier
dc.source.none.fl_str_mv reponame:Recercat. Dipósit de la Recerca de Catalunya
instname:Varias* (Consorci de Biblioteques Universitáries de Catalunya, Centre de Serveis Científics i Acadèmics de Catalunya)
instname_str Varias* (Consorci de Biblioteques Universitáries de Catalunya, Centre de Serveis Científics i Acadèmics de Catalunya)
reponame_str Recercat. Dipósit de la Recerca de Catalunya
collection Recercat. Dipósit de la Recerca de Catalunya
repository.name.fl_str_mv
repository.mail.fl_str_mv
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