Government Debt: A Key Role in Financial Intermediation

March 1, 2005

Preview Citation

Format: Chicago

Michael Kumhof, and Evan C Tanner. Government Debt: A Key Role in Financial Intermediation, (USA: International Monetary Fund, 2005) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The literature on optimal fiscal policy finds that highly volatile real returns on government debt, for example through surprise inflation, have very low costs. However, policymakers are almost always very apprehensive of this option. The paper discusses evidence concerning features of developing country financial markets that are missing in existing models, and that may suggest why this policy is considered so costly in practice. Most importantly, domestic banks choose to be highly exposed to government debt because the alternative, private lending, is more risky under existing legal and institutional imperfections. This exposure makes banks and their borrowers vulnerable to the government's debt policy.

Subject: Banking, Collateral, Public debt, Reserve requirements, Securities markets

Keywords: Bond market, Debt, Debt devaluation, Government debt, Market, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/057
Stock No:

WPIEA2005057
ISBN:

9781451860764
ISSN:

1018-5941

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