New Findings from Federal Reserve Bank in Economics Provides New Insights [Monetary Policy and Sovereign Risk In Emerging Economies (Nk-default)*]: Economics

2026 APR 20 (NewsRx) -- By a News Reporter-Staff News Editor at Economics Daily Report -- Investigators publish new report on Economics. According to news originating from Minneapolis, Minnesota, by NewsRx editors, the research stated, “This article develops a New Keynesian model with sovereign default risk. Inflation is set by forward-looking firms, monetary policy is an interest rate rule, and the fiscal government borrows externally, long-term, with an option to default.”

Our news journalists obtained a quote from the research from Federal Reserve Bank, “In this framework, default risk creates inflation pressures through an expectations channel, and tight monetary policy disincentivizes fiscal overborrowing. The model sheds light on temporary inflation events in emerging-market data: short-lived spikes in inflation, spreads, and domestic policy rates. As spreads rise, firms increase their prices in expectation of higher future inflation and low consumption during default. Monetary policy tightens, which reduces inflation and helps bring spreads down by disciplining government borrowing.”

According to the news editors, the research concluded: “These monetary-fiscal interactions imply that delivering the flexible-prices allocation may not be optimal for monetary policy.”

This research has been peer-reviewed.

For more information on this research see: Monetary Policy and Sovereign Risk In Emerging Economies (Nk-default)*. The Quarterly Journal of Economics, 2026. The Quarterly Journal of Economics can be contacted at: Oxford Univ Press Inc, Journals Dept, 2001 Evans Rd, Cary, NC 27513, USA.

The news correspondents report that additional information may be obtained from Cristina Arellano, Federal Reserve Bank, Minneapolis, MN 55401, United States.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1093/qje/qjag012. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

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