Collateral, liquidity and debt sustainability
- Author(s)
- Stefan Niemann, Paul Pichler
- Abstract
We study Markov-perfect optimal fiscal policy in an economy with financial frictions and sovereign default in the form endogenously determined haircuts on outstanding debt. Government bonds facilitate tax smoothing but also provide collateral and liquidity services that mitigate financial frictions. A debt Laffer curve exists, which induces the government to issue bonds to a point where marginal debt has negative welfare effects. Debt positions in the order of magnitude of annual output remain sustainable despite the option to default. When default happens, liquidity on the bond market is impaired, which can trigger extended periods of recurrent haircuts.
- Organisation(s)
- Department of Economics
- External organisation(s)
- Österreichische Nationalbank, University of Essex
- Journal
- The Economic Journal
- Volume
- 127
- Pages
- 2093-2126
- No. of pages
- 34
- ISSN
- 0013-0133
- DOI
- https://doi.org/10.1111/ecoj.12384
- Publication date
- 11-2015
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502046 Economic policy, 502047 Economic theory
- Keywords
- ASJC Scopus subject areas
- Economics and Econometrics
- Portal url
- https://ucris.univie.ac.at/portal/en/publications/collateral-liquidity-and-debt-sustainability(4e0526ae-d926-42f3-a257-62f247e02714).html