Every country has a fiscal limit on debt, where that limit represents a debt level so high that the country's economic and political systems cannot raise taxes or reduce spending sufficiently to maintain solvency. At the limit, creditors flee, and the government faces a fiscal crisis. If we knew...

It is widely believed that the Fiscal Theory of the Price Level (FTPL) does not work in an environment in which initial government debt is zero. This paper demonstrates that this view is incorrect when the government issues a set of financial assets restricted to standard nominal debt contracts...

This paper studies the interaction between time preference heterogeneity and precautionary saving in generating both persistent current account imbalance and a stationary equilibrium distribution of wealth across countries. We use numerical techniques to present two sets of results. First, when...

This paper combines insights from generation-one currency crisis models and the Fiscal Theory of the Price Level (FTPL) to create a new generation-one type model. Fiscal solvency is the fundamental generating crises, as in generation-one models. The initial fixed-exchange-rate policy entails...

A country entering a monetary union gives up the right to determine its own monetary policy. Individual fiscal authorities promise passive fiscal policy, allowing the central monetary authority to use active monetary policy. Since a government, which can print its own money, can honor its...

In this paper, we provide a theoretical explanation of why financial liberalization is likely to generate financial crises in emerging market economies. We first show that under financial repression the aggregate capital stock and bank net worth are both likely to be low. This leads a newly...

Investment necessary for growth is risky and often requires external financing. For an emerging market, access to international credit markets is volatile and interest rates reflect risk of default. We present a theoretical model in which emerging market agents have access to a profitable...

Abstract: A country entering the EMU surrenders its monetary policy, and its debt becomes denominated in terms of a currency over which it has no direct control. A country's promise to uphold the fiscal limits in the Maastricht Treaty and the Stability and Growth Pact is implicitly a promise not...

This paper presents a fiscal theory of exchange rate crises. When the fiscal authority allows the present value of primary surpluses inclusive of seigniorage to differ from the current real value of government debt at the pegged exchange rate and a constant expected future interest rate, then...