Tough Policies, Incredible Policies?

36 Pages Posted: 1 Sep 2003 Last revised: 21 Feb 2021

See all articles by Alejandro Neut

Alejandro Neut

Massachusetts Institute of Technology (MIT) - Department of Economics

Andrés Velasco

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: September 2003

Abstract

We revisit the question of what determines the credibility of macroeconomic policies here, of promises to repay public debt. Almost all thinking on the issue has focused on governments' strategic decision to default (or erode the value of outstanding debt via inflation/devaluation). But sometimes governments default not because they want to, but because they cannot avoid it: adverse shocks leave them no option. We build a model in which default/devaluation can occur deliberately (for strategic reasons) or unavoidably. If such unavoidable fiscal crises a) have pecuniary costs and b) occur with possible probability, much conventional wisdom on the determinantes of credibility need no longer hold. For instance, appointing a conservative policymaker or denominating public debt in foreign currency may reduce, not increase, credibility.

Suggested Citation

Neut, Alejandro and Velasco, Andrés, Tough Policies, Incredible Policies? (September 2003). NBER Working Paper No. w9932, Available at SSRN: https://ssrn.com/abstract=440601

Alejandro Neut

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Andrés Velasco (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
33
Abstract Views
1,267
PlumX Metrics