Tough Policies, Incredible Policies?

Andres Velasco and Alejandro Neut

No 9932, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We revisit the question of what determines the credibility of macroeconomic policies here, of promises to repay public debt. Almost all thinking on the issue has focused on governments' strategic decision to default (or erode the value of outstanding debt via inflation/devaluation). But sometimes governments default not because they want to, but because they cannot avoid it: adverse shocks leave them no option. We build a model in which default/devaluation can occur deliberately (for strategic reasons) or unavoidably. If such unavoidable fiscal crises a) have pecuniary costs and b) occur with possible probability, much conventional wisdom on the determinantes of credibility need no longer hold. For instance, appointing a conservative policymaker or denominating public debt in foreign currency may reduce, not increase, credibility.

JEL-codes: E0 F0 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-ifn, nep-lam, nep-mac and nep-pol
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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