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Safe Debt, Risky Capital

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Author Info
Bertocchi, Graziella

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Abstract

The author extends the Diamond (1965) model of national debt in two directions. She first introduces technological uncertainty and then she allows the stock of debt to vary. The author studies the dynamical equilibria of the resulting stochastic system and she establishes conditions for the existence of stationary states that are expressed in terms of invariant distributions. Since conditions that ensure the existence of a stochastic stationary state with positive debt are very restrictive, in this model financial instability is a pervasive phenomenon and allocations are in general dynamically inefficient. Copyright 1994 by The London School of Economics and Political Science.

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Publisher Info
Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 61 (1994)
Issue (Month): 244 (November)
Pages: 493-508
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Handle: RePEc:bla:econom:v:61:y:1994:i:244:p:493-508

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  1. Martin Barbie & Marcus Hagedorn & Ashok Kaul, 2004. "Assessing Aggregate Tests of Efficiency for Dynamic Economies," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  2. Nicola Cetorelli, 1998. "Could Prometheus be bound again? a contribution to the convergence controversy," Working Paper Series WP-98-3, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  3. de la Croix, David & Michel, Philippe, 1999. "National Debt Sustainability and the Dynamics in the Economy of Diamond," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1999015, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
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