Sovereign debt, fiscal policy, and macroeconomic instability

We study the relation between capital accumulation, fiscal policy, and sovereign debt dynamics in a small open economy. The government maximizes spending, facing borrowing constraints conditionality requirement. Debt are forward looking, being driven by endogenous constraint. Current is determined expectations about government's ability to finance itself future, opening room for indeterminacy. If believes it may issue more next period, constraint relaxes, current increases. invests productive activities, generating boom which increases tax revenues. However, as this increase does not repay additional debt, will confirming initial expectations. To exclude explosive trajectories, revenues must enough outstanding reduce future emission. This possible only with sufficiently procyclical rate. In case, if externalities large enough, economy exhibits local global indeterminacy, steady-state multiplicity also obtained. Avoiding rates, can prevent fluctuations self-fulfilling volatile differs from general wisdom that rates should be used stabilization.