High-debt countries may face the risk of self-fulfilling debt crises. If the public expects that in the future the government will be unable to roll over the maturing debt, they may refuse to buy debt today and choose to hold foreign assets. This lack of confidence may then be self-fulfilling....

We use a full general equilibrium 2-country, 2-period model with perfect capital markets, and intertemporal optimization and perfect foresight underlying private consumer behaviour in both countries to analyse the effects of pure fiscal policy. We demonstrate that higher government budget...

This paper provides an explanation of the simultaneous occurrence in developing countries of a large accumulation of external debt, private capital outflows and relatively low domestic capital formation. We consider a general equilibrium model in which two types of government with conflicting...

The conventional wisdom is (i) that fiscal austerity was the main culprit for the recessions experienced by many countries, especially in Europe, since 2010 and (ii) that this round of fiscal consolidation was much more costly than past ones. The contribution of this paper is a clarification of...

Fiscal consolidations achieved by means of spending cuts are much less costly in terms of output losses than tax-based ones. The difference cannot be explained by accompanying policies, including monetary policy, and it is mainly due to the different response of business confidence and private...

Blanchard (2005) suggested that active interest rate policy might induce unstable dynamics in highly-indebted economies. We examine this in a dynamic general equilibrium model where Calvo-type price rigidities provide a rationale for inflation stabilization. Unstable dynamics can occur when the...

Interest rates fell sharply after Mexico's Brady deal, and private investment and growth recovered. We show, econometrically, that debt relief influenced the macroeconomy mostly though its favourable impact on uncertainty. While the impact of the <MI>variability<D> of the future net transfer is...</d></mi>

This paper analyzes a model in which different rational individuals vote over the composition and time profile of public spending. Potential disagreement between current and future majorities generates instability in the social choice function that aggregates individual preferences. In...

This paper examines the effects of tax cuts in a multi-country world where both labour supply and capital formation are endogenous and taxes are distortionary. We highlight four channels through which tax cuts affect interest rates and the economy in general: (i) an increase in the supply of...

In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically,...