We analyse the poisonous interaction between bank rescues, financial fragility and sovereign debt discounts. In our model balance sheet constrained financial intermediaries finance both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face...

This paper examines the pricing of public debt in a quantitative macroeconomic model with government default risk. Default may occur due to a fiscal policy that does not preclude a Ponzi game. When a build-up of public debt makes this outcome inevitable, households stop lending such that the...

We study the consequences of non-neutrality of government debt for macroeconomic stabilization policy in an environment where prices are sticky. Assuming transaction services of government bonds, Ricardian equivalence fails because public debt has a negative impact on its marginal rate of return...

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...

Uncertainty about the future preferences of the government may induce policy makers to run excessive budget deficits. As a solution to this problem, economists have proposed to impose a binding debt rule. In this paper we argue that a binding debt rule does not eliminate the distortions due to...

We investigate the effectiveness of "Keynesian" fiscal stimuli when government deficits and debt rollovers are (possibly partially) financed by balance sheet constrained financial intermediaries. Because financial intermediaries operate under a leverage constraint, deficit financing of fiscal...