Tough Policies, Incredible Policies? / Andres Velasco, Alejandro Neut.

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Velasco, Andres

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w9932.Publication details: Cambridge, Mass. National Bureau of Economic Research 2003.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We revisit the question of what determines the credibility of macroeconomic policies here, of promises to repay public debt. Almost all thinking on the issue has focused on governments' strategic decision to default (or erode the value of outstanding debt via inflation/devaluation). But sometimes governments default not because they want to, but because they cannot avoid it: adverse shocks leave them no option. We build a model in which default/devaluation can occur deliberately (for strategic reasons) or unavoidably. If such unavoidable fiscal crises a) have pecuniary costs and b) occur with possible probability, much conventional wisdom on the determinantes of credibility need no longer hold. For instance, appointing a conservative policymaker or denominating public debt in foreign currency may reduce, not increase, credibility.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w9932 (Browse shelf(Opens below))	Not For Loan

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September 2003.

We revisit the question of what determines the credibility of macroeconomic policies here, of promises to repay public debt. Almost all thinking on the issue has focused on governments' strategic decision to default (or erode the value of outstanding debt via inflation/devaluation). But sometimes governments default not because they want to, but because they cannot avoid it: adverse shocks leave them no option. We build a model in which default/devaluation can occur deliberately (for strategic reasons) or unavoidably. If such unavoidable fiscal crises a) have pecuniary costs and b) occur with possible probability, much conventional wisdom on the determinantes of credibility need no longer hold. For instance, appointing a conservative policymaker or denominating public debt in foreign currency may reduce, not increase, credibility.