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Collateral, liquidity and debt sustainability

Niemann, S and Pichler, P (2013) Collateral, liquidity and debt sustainability. UNSPECIFIED. University of Essex, Department of Economics, Economics Discussion Papers, Colchester.

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Abstract

We study the sustainability of public debt in a closed production economy where a benevolent government chooses fiscal 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.

Item Type: Monograph (UNSPECIFIED)
Uncontrolled Keywords: sustainability; financial frictions; sovereign default; domestic debt; endogenous haircut.
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Users 161 not found.
Date Deposited: 28 Aug 2014 09:34
Last Modified: 17 Aug 2017 17:53
URI: http://repository.essex.ac.uk/id/eprint/8979

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