Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of conference participants
- 1 Introduction
- 2 The efficient design of public debt
- 3 Indexation and maturity of government bonds: an exploratory model
- 4 Public confidence and debt management: a model and a case study of Italy
- 5 Confidence crises and public debt management
- Discussion
- 6 Funding crises in the aftermath of World War I
- 7 The capital levy in theory and practice
- 8 Episodes in the public debt history of the United States
- 9 The Italian national debt conversion of 1906
- 10 Fear of deficit financing – is it rational?
- 11 Government domestic debt and the risk of default: a political–economic model of the strategic role of debt
- Index
Discussion
Published online by Cambridge University Press: 05 July 2011
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of conference participants
- 1 Introduction
- 2 The efficient design of public debt
- 3 Indexation and maturity of government bonds: an exploratory model
- 4 Public confidence and debt management: a model and a case study of Italy
- 5 Confidence crises and public debt management
- Discussion
- 6 Funding crises in the aftermath of World War I
- 7 The capital levy in theory and practice
- 8 Episodes in the public debt history of the United States
- 9 The Italian national debt conversion of 1906
- 10 Fear of deficit financing – is it rational?
- 11 Government domestic debt and the risk of default: a political–economic model of the strategic role of debt
- Index
Summary
A small open economy in a regime of fixed exchange rates and free capital mobility with a large stock of government debt that is rolled over every period is vulnerable to ‘confidence crises’. Such crises are brought about by exogenous changes in the expectations about the future value of the exchange rate that are self-fulfilling. Even when the level of the exchange rate is sustainable, that is there is a rational expectations equilibrium in which no devaluation occurs, there may be other equilibria, supported by ‘pessimistic’ expectations, in which the Central Bank is forced to devalue the currency. The goal of the paper is to demonstrate how appropriate public debt management, especially a lengthening of the average maturity of debt, can greatly reduce and indeed completely eliminate the possibility of such crises.
Let us first go over the mechanics of a confidence crisis, as described by Giavazzi and Pagano. A crisis occurs when agents expect a devaluation to occur in the next period. Such a change in expectations raises the domestic interest rate through the uncovered interest parity equation. This in turn generates an additional fiscal burden equal to the increase in the interest rate times the amount of debt rolled over in the period. The Treasury can finance the extra burden either by increasing borrowing from the private sector or by drawing from a temporary credit line with the Central Bank.
- Type
- Chapter
- Information
- Public Debt ManagementTheory and History, pp. 143 - 152Publisher: Cambridge University PressPrint publication year: 1990