Motivated the European debt crisis, we construct a tractable theory of sovereign debt and structural reforms under limited commitment. The government of a sovereign country which has fallen into a recession of an uncertain duration issues one-period debt and can renege on its obligations by...

Our aim is to provide insights into some basic facts of US government debt management by introducing simple financial frictions in a Ramsey model of fiscal policy. We find that the share of short bonds in total U.S. debt is large, persistent, and highly correlated with total debt. A well known...

We show how to model portfolio models in the presence of long bonds. Specifically we study optimal fiscal policy under incomplete markets where the government issues bonds of maturity N 1. Assuming the existence of long bonds introduces an additional intertemporal mechanism that makes taxes...

This paper proposes a dynamic politico-economic theory of fiscal policy in a world comprising a set of small open economies, whose driving force is the intergenerational conflict over debt, taxes, and public goods. Subsequent generations of voters choose fiscal policy through repeated elections....

This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in...

In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In...

This paper argues that the crisis was an outcome of EMU: setting a common monetary policy for countries with different initial inflation rates. The crisis countries were those with high inflation rates which then had negative real interest rates and consequently over-borrowed. Current policy...

The aim of this Paper is to test for the extent of incompleteness in the market for US Government debt. We show that when a government pursues an optimal tax policy and issues a full set of contingent claims, the value of debt has the same or less persistence than other variables in the economy...

This paper focuses on risk premiums paid by central governments in Europe and sub-national governments in Germany, Spain, and Canada. With regard to the European governments, we are interested in how these premiums were affected by the introduction of the euro. Using data for bond yield spreads...

This paper analyses two features of concern to policy-makers in the countries of the prospective European Monetary Union: the solvency of their government’s finances; and the accuracy of fiscal forecasts. Extending the existing methodology of solvency tests, the paper finds that, with few...