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

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  • Alberto Alesina
  • Alessandro Prati
  • Guido Tabellini

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. In the contrary, a long and evenly distributed maturity structure may reduce such a risk. We consider the recent Italian experience from this perspective. In particular we ask whether recent developments in the market for government debt showy signs of unstable public confidence, and of a risk premium.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3135.

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Date of creation: Oct 1989
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Publication status: published as R. Dornbusch and M. Draghi, editors. Debt Management and Capital Markets. London: Cambridge University Press, 1990.
Handle: RePEc:nbr:nberwo:3135

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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. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  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. 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.
  5. Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, vol. 32(2-3), pages 542-550, March.
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