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In times of fiscal stress, governments fail to adjust fiscal policy in line with the requirements for debt sustainability. Under these circumstances, monetary policy impacts the probability of sovereign default alongside inflation dynamics. Uribe (2006) studies the relationship between inflation...
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becomes more active as the fraction of liquidity constrained agents increases; (iii) optimal discretionary policies imply … welfare losses for Ricardian, while liquidity constrained consumers experience welfare gains with respect to Ramsey. …
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