Government size and speculative attacks on public debt

Pompeo Della Posta

International Review of Economics & Finance, 2021, vol. 72, issue C, 79-89

Abstract: In this paper I set up a primary surplus target zone model—differently from some previous papers that used instead an interest rate target zone model— both to interpret the public debt euro area crisis and, more importantly, to draw some more general conclusions as to the role of the primary surplus in preventing speculative attacks against public debt. This primary surplus target zone model also allows considering the effects resulting from either a small or a big government. If a small government determines a higher GDP growth than a big one, then a higher steady state public debt-to-GDP level can be obtained in the first case. However, this paper shows that in the case of a credible fiscal upper target it also turns out that such a difference does not affect the size of the expectation effect determining the ‘honeymoon’. Moreover, when the primary surplus reaches its upper boundary—something that will occur inevitably, irrespective of the size of the government determining the primary surplus— monetary policy and the presence of a lender of last resort remain essential to stabilize the public debt and avoid speculative attacks.

Keywords: Euro area crisis; Primary surplus; Government size; Target zones; Public debt; Speculative attacks (search for similar items in EconPapers)
JEL-codes: E65 F34 F36 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:72:y:2021:i:c:p:79-89

DOI: 10.1016/j.iref.2020.11.004

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