For countries in the Eurozone , the euro is the local currency, although no single state can trigger inflation by creating more currency. Lending to a local or municipal government can be just as risky as a loan to a private company, unless the local or municipal government has sufficient power to tax. In this case, the local government could to a certain extent pay its debts by increasing the taxes, or reduce spending, just as a national one could.
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Further, local government loans are sometimes guaranteed by the national government, and this reduces the risk. In some jurisdictions, interest earned on local or municipal bonds is tax-exempt income, which can be an important consideration for the wealthy. Public debt clearing standards are set by the Bank for International Settlements , but defaults are governed by extremely complex laws which vary from jurisdiction to jurisdiction. Globally, the International Monetary Fund can take certain steps to intervene to prevent anticipated defaults.
It is sometimes criticized for the measures it advises nations to take, which often involve cutting back on government spending as part of an economic austerity regime. In triple bottom line analysis, this can be seen as degrading capital on which the nation's economy ultimately depends. Those considerations do not apply to private debts, by contrast: credit risk or the consumer credit rating determines the interest rate , more or less, and entities go bankrupt if they fail to repay.
Governments need a far more complex way of managing defaults because they cannot really go bankrupt and suddenly stop providing services to citizens , albeit in some cases a government may disappear as it happened in Somalia or as it may happen in cases of occupied countries where the occupier doesn't recognize the occupied country's debts. Smaller jurisdictions, such as cities, are usually guaranteed by their regional or national levels of government. When New York City declined into what would have been a bankrupt status during the s had it been a private entity , by the mids a " bailout " was required from New York State and the United States.
In general, such measures amount to merging the smaller entity's debt into that of the larger entity and thereby giving it access to the lower interest rates the larger entity enjoys. The larger entity may then assume some agreed-upon oversight in order to prevent recurrence of the problem. According to Modern Monetary Theory , public debt is seen as private wealth and interest payments on the debt as private income. The outstanding public debt is an expression of the accumulated previous budget deficits which have added financial assets to the private sector, providing demand for goods and services.
Adherents of this school of economic thought argue that the scale of the problem is much less severe than is popularly supposed. In the dominant economic policy generally ascribed to theories of John Maynard Keynes , sometimes called Keynesian economics , there is tolerance for fairly high levels of public debt to pay for public investment in lean times, which, if boom times follow, can then be paid back from rising tax revenues.
Empirically, however, sovereign borrowing in developing countries is procyclical, since developing countries have more difficulty accessing capital markets in lean times. As this theory gained global popularity in the s, many nations took on public debt to finance large infrastructural capital projects—such as highways or large hydroelectric dams.
Debt Dynamics in China—Serious problems but an imminent crisis is unlikely
It was thought that this could start a virtuous cycle and a rising business confidence since there would be more workers with money to spend. Some [ who? Of course, military expenditures are based upon the same tax or debt and spend fundamentals as the rest of the national budget, so this argument does little to undermine Keynesian theory.
Indeed, some [ who? Nonetheless, the Keynesian scheme remained dominant, thanks in part to Keynes' own pamphlet How to Pay for the War , published in the United Kingdom in These are the dominant economic entities setting policies regarding public debt. Due to its role in setting policies for trade disputes , the World Trade Organization also has immense power to affect foreign exchange relations, as many nations are dependent on specific commodity markets for the balance of payments they require to repay debt.
Sovereign debt problems have been a major public policy issue since World War II , including the treatment of debt related to that war, the developing country "debt crisis" in the s, and the shocks of the Russian financial crisis and Argentina's default in Government "implicit" debt is the promise by a government of future payments from the state. Usually this refers to long-term promises of social payments such as pensions and health expenditure; not promises of other expenditure such as education or defense which are largely paid on a " quid pro quo " basis to government employees and contractors.
A problem with these implicit government insurance liabilities is that it is hard to cost them accurately, since the amounts of future payments depend on so many factors. First of all, the social security claims are not "open" bonds or debt papers with a stated time frame, " time to maturity ", " nominal value ", or " net present value ". In the United States, as in most other countries, there is no money earmarked in the government's coffers for future social insurance payments. Alternative social insurance strategies might have included a system that involved save and invest.
Furthermore, population projections predict that when the " baby boomers " start to retire, the working population in the United States, and in many other countries, will be a smaller percentage of the population than it is now, for many years to come. This will increase the burden on the country of these promised pension and other payments—larger than the 65 percent  of GDP that it is now. In the European Commission required EU Member Countries to publish their debt information in standardized methodology, explicitly including debts that were previously hidden in a number of ways to satisfy minimum requirements on local national and European Stability and Growth Pact level.
The following model of sovereign debt dynamics comes from Romer Otherwise, the country could borrow an infinite amount of money.
The representative household's budget constraint is that the present value of its consumption cannot exceed its initial wealth plus the present value of its after-tax income. Moreover, this is the famous result known as Ricardian equivalence : only the quantity of government purchases affects the economy, not the method of financing i.
From Wikipedia, the free encyclopedia. See also: List of countries by public debt. Fiscal policy. Monetary policy. Bank reserves requirements Discount window Gold reserves Interest rate Monetary authority central bank currency board Monetary base Monetary currency union Money supply. Trade policy. Revenue Spending. Non-tax revenue Tax revenue Discretionary spending Mandatory spending.
Balanced budget Economic growth Price stability.
Fiscal adjustment Monetary reform. Main article: government bond. This article or section may contain misleading parts. Please help clarify this article according to any suggestions provided on the talk page. October Further information: List of countries by public debt and List of countries by future gross government debt. Outdated Tables. Further information: Municipal bond. Main article: Credit risk. Main articles: sovereign default , clearing finance , and default finance.
This section does not cite any sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. January Learn how and when to remove this template message. United States Department of the Treasury. Archived from the original on October 13, Retrieved October 12, Archived from the original on October 21, Federal Reserve Bank of Boston. Retrieved 22 March Retrieved 10 May Its primary purpose was to raise and lend money to the State and in consideration of this service it received under its Charter and various Act of Parliament, certain privileges of issuing bank notes.
The corporation commenced, with an assured life of twelve years after which the Government had the right to annul its Charter on giving one year's notice. Roseveare, The Financial Revolution — , Longman , p. Penguin Books, London. Federal Reserve Board of Chicago. Retrieved Nicolas J. Retrieved September 1, Retrieved May 16, Archived from the original on October 4, Retrieved November 8, December 1, Encyclopedia of Russian History reprinted in Encyclopedia.
Retrieved 3 March Journal of Economic Literature. International Monetary Fund.
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Although low rates indeed indicate that higher debt levels are sustainable, Rogoff stresses that additional debt still is not a free lunch, as it reduces the margin of manoeuvre for governments in the presence of shocks, thereby increasing the risk of long-term stagnation. According to this theory explained in greater detail by Josh Barro , larger budgetary deficits are not an issue, insofar as they can be financed by the central bank. Such a framework would require the abandonment of one of the central tenets of current advanced economies, namely the independence of central banks, since the latter would be forced not only to closely coordinate with the relevant Treasury, but also to keep interest rates close to zero and, in extreme scenarios, to directly purchase mortgage and corporate debt.
The main risk would then be represented by the inability to avoid hyper inflation in the case that a government keeps spending in a full-employment scenario — a risk probably not worth taking, according to Smith. MMT advocates explain that tax increases should be given the role of keeping inflation under control.
This is considered one of the major weaknesses of the approach even by some of its supporters , as the political incentives to raise taxes in order to exert downward pressure on inflation would be limited at best.
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In fact, the persistent and sizeable primary deficit of the American public sector around 3. A recession would further boost the deficit, as well as any infrastructure plan not funded by taxes. Nonetheless, it reignites a debate of utmost importance, especially in the current context of dismal growth prospects. The Bloomberg editorial board , for instance, already asked the German government to start preparing expansionary fiscal plans, were the observed economic slowdown to persist. Bruegel considers itself a public good and takes no institutional standpoint.
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But this indicator is not observed, only estimations can be made. This post shows that estimates of the European Commission, the IMF, the OECD and national governments widely differ from each other and all estimates are subject to very large annual revisions. The EU should get rid of the fiscal rules that rely on structural balance estimates and use this opportunity to fundamentally reform its fiscal framework. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy.
But the debate about the reliability of output-gap estimates is more wide-ranging. Independent fiscal institutions have no formal powers to act and have to rely on soft power to influence the budgetary process. This blog post investigates how they exercise this soft power by enhancing public scrutiny of fiscal policies. According to the authors, this fall would be even more marked in the absence of offsetting fiscal policies.
Policymaking in a world of permanently low interest rates may be hard to navigate, especially in troubled waters. An old debate is back with a kick.
The discussion around modern monetary theory first gained traction in the economic blogosphere around Recent interventions in the US and UK political arenas rekindled the interest in the heterodox theory that is now seeping into mainstream debates. The authors map how much fiscal debt is in the hands of domestic and foreign holders in the euro area. While the market for debt was much more international prior to the crisis, this trend has since been reversed.
At the same time, central banks have become important holders of fiscal debt. Since then, two developments have taken place: one good, and one bad. This blog post reviews them. For a long time, southern and eastern Mediterranean countries struggled with serious socio-economic challenges and dysfunctional economic systems and policies.
Read article More on this topic. Read article More on this topic More by this author. How visible are independent fiscal institutions in public debate?