The monetary foundations in Pasinetti’s public debt theory

Sovereign debt sustainability has become a central concern worldwide. By criticising the Maastricht fiscal orthodoxy, Pasinetti suggests that the fiscal, monetary, and financial nexus in government borrowing needs to be reconceptualised to develop new approaches to public finance. This paper reconciles Pasinetti’s public debt theories, models, and arguments with the latent monetary foundations rooted in the Structural Economic Dynamics: (1) the use of a commodity (non-financial) rate of interest typical of a pure-labor economy; (2) the concept of public debt as ‘outside debt’; (3) the dual nature of public debt, simultaneously an asset and a liability. Rethinking Pasinetti’s framework reshapes our understanding of public debt management by integrating his theories with the Minskyan cash-flow problem in a financial system of hierarchically tiered and interconnected balance sheets. The concern surrounding debt sustainability no longer hinges on the discrepancy between the interest rate and the growth rate, but rather on the regulation of liquidity within the financial system—a process that ultimately depends on effective fiscal–monetary policy coordination.