Confidence Crises and Public Debt Management

27 Pages Posted: 7 Apr 2004 Last revised: 12 Jul 2010

See all articles by Francesco Giavazzi

Francesco Giavazzi

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: April 1989

Abstract

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 positive probability of devaluation. These equilibria can be ruled out if the amount of debt maturing during the crisis is sufficiently small- a condition that can be met by reducing the stock of public debt, lengthening its average maturity and/or smoothing the time distribution of maturing issues.

Suggested Citation

Giavazzi, Francesco and Pagano, Marco, Confidence Crises and Public Debt Management (April 1989). NBER Working Paper No. w2926. Available at SSRN: https://ssrn.com/abstract=457568

Francesco Giavazzi (Contact Author)

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

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+39 02 5836 3304 (Phone)
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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Marco Pagano

University of Naples Federico II - Department of Economics and Statistics ( email )

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Napoli, 80126
Italy
+39 081 675306 (Phone)
+39 081 7663540 (Fax)

Centre for Studies in Economics and Finance (CSEF) ( email )

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Complesso Monte S. Angelo
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Italy

Einaudi Institute for Economics and Finance (EIEF)

Via Sallustiana, 62
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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