BIGFI/Finance Seminar with Paul Fontanier, Yale School of Management

The Department of Finance and BIGFI is proud to announce the upcoming seminar with Paul Fontanier, Yale School of Management.

Paul Fontanier will present: Sovereign Bond Purchases and Roll-Over Crises

Abstract: This paper proposes a theory of large-scale government bond purchases by central banks in an environment with endogenous information acquisition. Information acquisition by private investors lowers risk premia by reducing uncertainty, but also makes prices more sensitive to new information. This can drive the sovereign into costly roll-over crises. Asset purchases by the central bank discourage private information acquisition, impairing price informativeness. This, however, points to a benefit of such large scale programs: by implementing purchases, the central bank can avoid the occurrence of roll-over crises in the event of bad news, generating large welfare gains. A key property of the model is that substantial purchases may be required, while small interventions have ambiguous welfare consequences. When the sovereign expects the central bank to carry such programs, it leads to excessive indebtedness, forcing the central bank to run an inflated balance sheet to avoid roll-over crises.

Location:
Solbjerg Plads 3
2000 Frederiksberg
Room: SPs03