Motivated by empirical facts, we develop a theoretical model for optimal currency government debt portfolio and debt payments, which allows both government debt aversion and jumps in the exchange rates. We obtain first a realistic stochastic differential equation for public debt, and then solve explicitly the optimal currency debt problem. We show that higher debt aversion and jumps in the exch...

The fiscal theory offers an attractive perspective. First, with interest rates near zero, money and government bonds are nearly perfect substitutes, especially for the banks and financial institutions at the center of economic events. Conventional monetary policy analysis aimed at the split of government debt holdings between “monetary” and “debt” assets seems rather irrelevant; the big events ...

We analyze the determinants of government debt under the twin assumptions that governments have limited horizons and default only when government income falls short of debt service requirements. We derive a government’s maximum sustainable debt ratio, that is, the debt ratio chosen by a myopic government whose horizon does not extend beyond its current term in office. Maximum sustainable debt v...

Emerging market countries increasingly issue nominal government debt. At the same time, these countries experience sovereign debt crises with default and high inflation. This paper studies the implications of debt denomination for sovereign default and inflation policies. Using bond-level data on government borrowing, I show that default and inflation rates vary systematically with debt denomin...

Currency crises that coincide with banking crises tend to share at least three elements. First, banks have a currency mismatch between their assets and liabilities. Second, banks do not completely hedge the associated exchange rate risk. Third, there are implicit government guarantees to banks and their foreign creditors. This paper argues that the "rst two features arise from banks' optimal re...

Consider the problem of a government that wants to control its debt-to-GDP (gross domestic product) ratio, while taking into consideration the evolution of the inflation rate of the country. The uncontrolled inflation rate follows an Ornstein-Uhlenbeck dynamics and affects the growth rate of the debt ratio. The level of the latter can be reduced by the government through fiscal interventions. T...

This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and cannot commit to fiscal policy. If the government can perfectly commit, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do no...

As for the East Asian countries, the total amount of government debt in Korea has risen sharply over the following several years in the wake of the Asian financial crisis. The purpose of this paper is to assess whether the current levels of government debt are sustainable for a severely attacked country, namely, Korea. Under the intertemporal budget constraint model, the study tests for fiscal ...