It has been recognized that the optimal strategy of a government is generally time-inconsistent: optimality requires that the government take into account expectations effects in the formulation of its policy and to ignore these effects when applying the policy. In order to analyse the problem,...

The dynamic inconsistency of a government's preferred policy, when it occurs, usually implies that the maximum level of welfare that can be delivered at some initial time can only be attained by constraining the economy to `low' levels in the future. In this paper, we set up a linear quadratic...

The authors study different solutions to a simple one-dimensional linear qua dratic game with a large number of private agents and a government. A "time-consistent" solution is defined as a solution to the Hamilton- Jacobi-Bellman equation, i.e., as a policy for which the government has no...

In the first part of the paper I calculate the returns on developing countries' debt obtained by their (private and public) creditors (when taking account of the transfers already generated and of the liquidative value of the debt) and show that they are satisfactory. I then evaluate the...

The Paper highlights one critical difference between Europe and the US regarding the Phillips curve: the behaviour of prices. While they are quickly restored to an equilibrium level in the US, European prices are driven by highly counter-cyclical mark-ups. In bad times, European firms manage to...

If interest rates (country spreads) rise, debt can rapidly be subject to a snowball effect, which then becomes self-fulfilling with regard to the fundamentals themselves. This is a market imperfection, because we cannot be confident that the unaided market will choose the ‘good equilibrium’...

The paper examines the behaviour of 100 firms interviewed regularly between 1993-4. It reaches the following conclusions:1) Following the inter-enterprise debt (IED) crisis of 1992, most firms have switched to a `pay-in-advance' system, which pushed firms towards a `hard budget constraint'...