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Confidence Crises and Public Debt Management

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Author Info
Francesco Giavazzi
Marco Pagano

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2926.

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Date of creation: Apr 1989
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Handle: RePEc:nbr:nberwo:2926

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This page was last updated on 2009-11-25.

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