Fiscal policy, eurobonds and economic recovery: some heterodox policy recipes against financial instability and sovereign debt crisis
AbstractIn this paper, we propose a simple post-Keynesian model on the linkages between the financial and real side of an economy. We show how, according to the Minskyan instability hypothesis, financial variables, credit availability and asset prices in particular, may feedback each other and affect economic activity, possibly giving rise to intrinsically unstable economic processes. Through these destabilizing mechanisms, we also explain why governments intervention in the aftermath of the 2007 financial meltdown has been largely useless to restore financial tranquility and economic growth, but transformed a private debt crisis into a sovereign debt one. The paper ends up by looking at the long-run and to the interaction between long-term growth potential and public debt sustainability. We explicitly consider the Euro-zone economic context and the difficulties several EU members currently face to simultaneously support economic recovery and consolidate fiscal imbalances. We stress that: (i) financial turbulences may trigger permanent reductions in long-term growth potential and unsustainable public debt dynamics; (ii) strong institutional discontinuity such as Eurobond issuances may prove to be the only way to restore growth and ensure long-run public debt sustainability.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 33860.
Date of creation: Sep 2011
Date of revision:
post-Keynesian models; financial instability; debt sustainability; Eurobonds;
Other versions of this item:
- Alberto Botta, 2011. "Fiscal Policy, Eurobonds and Economic Recovery: Some Heterodox Policy Recipes against Financial Instability and Sovereign Debt Crisis," Economics and Quantitative Methods qf1114, Department of Economics, University of Insubria.
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-15 (All new papers)
- NEP-EEC-2011-10-15 (European Economics)
- NEP-FDG-2011-10-15 (Financial Development & Growth)
- NEP-HME-2011-10-15 (Heterodox Microeconomics)
- NEP-MAC-2011-10-15 (Macroeconomics)
- NEP-PKE-2011-10-15 (Post Keynesian Economics)
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