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Servicing the Public Debt: The Role of Expectations

Guillermo Calvo

American Economic Review, 1988, vol. 78, issue 4, 647-61

Abstract: The author studies models in which debt repudiation, openly or through inflation, is possible. The government maximizes the utility of the representative individual, and the author focuses on n o-precommitment equilibria of the Barro-Gordon type. He shows cases i n which the existence of government bonds generate multiple perfect-f oresight equilibria. However, price indexation and/or interest-rate c eilings are shown to be possible solutions of the equilibrium multipl icity problem. Copyright 1988 by American Economic Association.

Date: 1988
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