Collateral, Liquidity and Debt Sustainability

Arbeitspapier

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

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 187

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; Fiscal Policy ; Taxation and Subsidies: Efficiency; Optimal Taxation ; National Debt; Debt Management; Sovereign Debt
• Subject: sustainability ; nancial frictions ; sovereign default ; domestic debt ; endogenous haircut

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Niemann, Stefan ; Pichler, Paul
• Event: Veröffentlichung
• (who): Oesterreichische Nationalbank (OeNB)
• (where): Vienna
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/264779
• Last update: 10.03.2025, 11:42 AM CET