Working Paper: CEPR ID: DP351
Authors: Alberto Alesina; Alessandro Prati; Guido Tabellini
Abstract: High-debt countries may face the risk of self-fulfilling debt crises. If the public expects that in the future the government will be unable to roll over the maturing debt, they may refuse to buy debt today and choose to hold foreign assets. This lack of confidence may then be self-fulfilling. This paper argues that under certain conditions, the occurrence of a confidence crisis is more likely if the average maturity of the debt is short. Conversely, a long and evenly distributed maturity structure may reduce the risk. We consider the recent Italian experience from this perspective. In particular we ask whether recent developments in the market for government debt show signs of unstable public confidence and a risk premium.
Keywords: public debt; confidence crisis; maturity structure
JEL Codes: 31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public Confidence (H12) | Demand for Debt (E41) |
| Demand for Debt (E41) | Government's Ability to Roll Over Debt (H63) |
| Average Maturity of Debt (G32) | Public Confidence (H12) |
| Average Maturity of Debt (G32) | Demand for Debt (E41) |
| Public Confidence (H12) | Risk of Default (G33) |
| Average Maturity of Debt (G32) | Risk of Default (G33) |