The paper considers the role of limits upon the permissible growth of public debt, like those stipulated in the Maastricht treaty, in making price stability possible, It is shown that a certain type of fiscal instability, namely variations in the present value of current and future primary government budgets, necessarily results in price level instability,…
The recent fi nancial crisis and recession has left a legacy of historically high and rising level of public indebtedness across the advanced economies. The central policy debate across Europe, Japan, and the United States now centers on how fast to stabilize soaring public debt/GDP ratios, given that post-crisis growth remains fragile. We bring evidence…
The recent sharp increase in fiscal deficits and government debt in many countries raises questions regarding their impact on long-term sovereign bond yields. While economic theory suggests that this impact is likely to be adverse, empirical results have been less clear cut, have generally ignored nonlinear effects of deficits and debt through some other key…
Under free capital mobility, confidence crises can result in devaluations even when fixed exchange rates are viable, if fiscal authorities can obtain temporary money financing. During a crisis, domestic interest rates increase reflecting the expected devaluation. Rather than selling debt at punitive rates, fiscal authorities will turn to temporary money financing, leading to equilibria with…
