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Fiscal Policy, Eurobonds and Economic Recovery: Some Heterodox Policy Recipes against Financial Instability and Sovereign Debt Crisis

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  • Alberto Botta

    (Department of Economics, University of Insubria, Italy)

Abstract

In 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 European 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 EU financial assistance to member countries may prove to be the only way to restore growth and ensure long-run public debt sustainability.

Suggested Citation

  • 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.
    • Handle: RePEc:ins:quaeco:qf1114
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    Cited by:

    1. Alberto Botta, 2014. "Structural Asymmetries at the Roots of the Eurozone Crisis: What’s New for Industrial Policy in the EU?," Economics Working Paper Archive wp_794, Levy Economics Institute.
    2. Alberto Botta, 2012. "Conflicting Claims in the Eurozone? Austerity’s Myopic Logic and the Need for a European Federal Union in a post-Keynesian Eurozone Center-Periphery Model," DEM Working Papers Series 011, University of Pavia, Department of Economics and Management.
    3. Zarko Kalamov & Klaas Staal, 2016. "Public debt, bailouts, and common bonds," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(4), pages 670-692, August.

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    More about this item

    Keywords

    post-Keynesian models; financial instability; debt sustainability; Eurobonds JEL Classification: E12; E44; H63;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • 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

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