Fiscal Policy, Eurobonds and Economic Recovery: Some Heterodox Policy Recipes against Financial Instability and Sovereign Debt Crisis

Alberto Botta

Economics and Quantitative Methods from Department of Economics, University of Insubria

Abstract: In this paper, we propose a simple post-Keynesian model on the linkages between the financial and real side of an economy. We show how, according to the Minskyan instability hypothesis, financial variables, credit availability and asset prices in particular, may feedback each other and affect economic activity, possibly giving rise to intrinsically unstable economic processes. Through these destabilizing mechanisms, we also explain why governments intervention in the aftermath of the 2007 financial meltdown has been largely useless to restore financial tranquility and economic growth, but transformed a private debt crisis into a sovereign debt one. The paper ends up by looking at the long run and to the interaction between long-term growth potential and public debt sustainability. We explicitly consider the European economic context and the difficulties several EU members currently face to simultaneously support economic recovery and consolidate fiscal imbalances. We stress that: (i) financial turbulences may trigger permanent reductions in long-term growth potential and unsustainable public debt dynamics; (ii) strong institutional discontinuity such as EU financial assistance to member countries may prove to be the only way to restore growth and ensure long-run public debt sustainability.

Keywords: post-Keynesian models; financial instability; debt sustainability; Eurobonds JEL Classification: E12; E44; H63 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2011-12
New Economics Papers: this item is included in nep-eec, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Fiscal policy, eurobonds and economic recovery: some heterodox policy recipes against financial instability and sovereign debt crisis (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ins:quaeco:qf1114

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