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Limited Liability Government Debt for the Eurozone -super-†

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  • Alistair K. L. Milne

Abstract

The Maastricht treaty, notably the article 103 prohibition on 'bail-outs', gave a prominent role to market disciplines on fiscal policy. These were not effective, failing to prevent the Euro area government debt crisis. This article suggests that these market disciplines can be made effective through issue of 'limited liability' debt (debt with a maximum debt service obligation as a proportion of GDP), together with rules constraining bank holdings of government debt and maturity structure, and a senior liquidity facility. This proposal is supported by analysis of fiscal arrangements within single currency areas and of emerging market sovereign debt restructuring. (JEL codes: E42, E62, H6 and H87) Copyright The Author 2011. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Alistair K. L. Milne, 2011. "Limited Liability Government Debt for the Eurozone -super-†," CESifo Economic Studies, CESifo, vol. 57(1), pages 44-78, March.
  • Handle: RePEc:oup:cesifo:v:57:y:2011:i:1:p:44-78
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifq023
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Stephany Griffith-Jones & Krishnan Sharma, 2006. "GDP-Indexed Bonds: Making It Happen," Working Papers 21, United Nations, Department of Economics and Social Affairs.
    3. Milne,Alistair, 2009. "The Fall of the House of Credit," Cambridge Books, Cambridge University Press, number 9780521762144, May.
    4. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521731867, May.
    5. Henrik Enderlein & Johannes Lindner & Oscar Calvo-Gonzalez & Raymond Ritter, 2005. "The EU budget – how much scope for institutional reform?," Public Economics 0509005, EconWPA.
    6. Chui, Michael & Gai, Prasanna & Haldane, Andrew G., 2002. "Sovereign liquidity crises: Analytics and implications for public policy," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 519-546, March.
    7. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521516730, May.
    8. Adrian Blundell-Wignall & Patrick Slovik, 2010. "The EU Stress Test and Sovereign Debt Exposures," OECD Working Papers on Finance, Insurance and Private Pensions 4, OECD Publishing.
    9. Michael Bordo & Harold James, 2008. "A Long Term Perspective on the Euro," European Economy - Economic Papers 2008 - 2015 307, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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