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INTEREST RATE TARGETS AND SPECULATIVE ATTACKS ON PUBLIC DEBT

Published online by Cambridge University Press:  16 March 2018

Pompeo Della Posta
Pompeo Della Posta*
Affiliation:
Università di Pisa
*
Address correspondence to: Pompeo Della Posta, Università di Pisa, Dipartimento di Economia e Management, Via Ridolfi 10, 56124 Pisa, Italy; e-mail: pompeo.della.posta@unipi.it
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Abstract

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The application of exchange rate target zones modeling to interest rates allows interpreting the puzzles that emerged with the public debt euro area crisis, namely the nonlinear behavior of the interest rates and the fact that some stand-alone countries, not belonging to the euro area, have not been subject to speculative attacks in spite of equally large public debt-to-gross domestic product (GDP) ratios. As a matter of fact, this model shows that in the case of a noncredible upper threshold for the interest rate (that may be due to both the lack of room for increasing further the required government primary surplus and/or the absence of a monetary authority acting as a lender of last resort), the resulting public debt unsustainability determines an interest rate nonlinearity and makes the crisis possible for public debt levels that would be stable in the presence of a credible interest rate target.

Keywords

Euro Area CrisisInterest RatesTarget ZonesPublic DebtSpeculative Attacks

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 7 , October 2019, pp. 2698 - 2716
Copyright
Copyright © Cambridge University Press 2018 

Footnotes

I thank the PRA (Progetti di Ricerca di Ateneo) program of the University of Pisa for the financial support. I also thank two anonymous referees for their precious comments and suggestions. Needless to say I remain the sole responsible for any remaining mistake.

References

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