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Public Confidence and Debt Management: A Model and a Case Study of Italy

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  • Alesina, Alberto F
  • Prati, Alessandro
  • Tabellini, Guido

Abstract

High-debt countries may face the risk of self-fulfilling debt crises. If the public expects that in the future the government will be unable to roll over the maturing debt, they may refuse to buy debt today and choose to hold foreign assets. This lack of confidence may then be self-fulfilling. This paper argues that under certain conditions, the occurrence of a confidence crisis is more likely if the average maturity of the debt is short. Conversely, a long and evenly distributed maturity structure may reduce the risk. We consider the recent Italian experience from this perspective. In particular we ask whether recent developments in the market for government debt show signs of unstable public confidence and a risk premium.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 351.

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Date of creation: Oct 1989
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Handle: RePEc:cpr:ceprdp:351

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Keywords: Confidence Crisis; Debt Crisis; Government Debt; Public Debt;

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  1. Francesco Giavazzi & Marco Pagano, 1989. "Confidence Crises and Public Debt Management," NBER Working Papers 2926, National Bureau of Economic Research, Inc.
  2. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
  3. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  4. Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, vol. 32(2-3), pages 542-550, March.
  5. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
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