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- Title
Collateral, liquidity and debt sustainability.
- Authors
Niemann, Stefan; Pichler, Paul
- Abstract
We study the sustainability of public debt in a closed production economy where a benevolent government chooses scal policies, including haircuts on its outstanding debt, in a discretionary manner. Government bonds are held by domestic agents to smooth consumption over time and because they provide collateral and liquidity services. We characterize a recursive equilibrium where public debt amounts to a sizeable fraction of output in steady state and is nevertheless fully serviced by the government. In a calibrated economy, steady state debt amounts to around 84% of output, the government's default threshold is at around 94% of output, and the haircut on outstanding debt at this threshold is around 40%. Both reputational costs of default and contemporaneous costs due to lost collateral and liquidity are essential to generate these empirically plausible predictions.
- Subjects
EUROPE; PUBLIC debts; HAIRCUT (Finance); GOVERNMENT securities; FISCAL policy; FINANCIAL crises; ECONOMICS
- Publication
Working Papers (Oesterreichische Nationalbank), 2013, Issue 187, p1
- ISSN
2310-5321
- Publication type
Article